by Mark Goldstein
Things in the auto industry are not looking so universally-positive anymore, and Ford (F) and General Motors (GM) are the auto companies struggling. There's not much good news for the American auto makers right now, especially as their foreign rivals, namely Toyota (TM), Honda (HMC), and Tesla (TSLA), are all pushing new features and involved in promising developments.
Let's start with Ford, which is clearly in more trouble than GM right now.
Ford is experiencing a drop in ratings due to the continuing weakness in Europe and the fact that demand is lower in South America than the company expected. Analysts have noted that the industry is strong in the United Kingdom and Russia, but the overall industry in Europe has not been doing well. As investors take note of this, they would likely want to see Ford responding well to the situation and focusing more on strong markets. Only time will tell whether or not the company will do this, but the company is not in great shape either way. It has several situations that it must recover from before it can do well again.
Federal safety regulators are currently probing roughly 83,000 2011 Ford Explorers due to the occasional failure of the power steering. Probes like this can occasionally result in a vehicle recall, so shareholders should pay close attention to this. No matter what, this will make potential customers more wary about Ford Explorers due to possible safety concerns. If a recall occurs, however, it will have a more direct financial impact. This event is troubling at the moment, but the real impact of it depends on how this probe develops further.
This is not the end of the bad news either, as Ford will have to deal with decreased sales numbers as well. General Motors and Ford began the year well, but their sales have been decreasing over the course of the last three months. This has led analysts to cut the projected sales numbers, so Ford does not look as good as it previously did. As more investors become aware of how these projections have been cut, stock prices for General Motors and Ford will likely be decreasing. If the situations in Europe and South America continue to be problematic, this could lead to further decreases in the future.
With the problematic situation in Europe, investors may not be so excited about the fact that Ford has increased its investment in vehicle and engine production in Romania. It has now invested more than $836 million in the country, and the Romanian plant will produce the Ford B-MAX and the 1.0 EcoBoost engine. While the company refers to this as a world-class facility, I do not expect investors to get as excited about this. One may hope that Ford's actions will help revitalize the industry in Romania and other parts of Europe, but this is a time where expansion in Europe is a risky move. I do not expect this to hurt the stock, but I think the situation in Europe will keep investors from applauding the move from Ford.
General Motors investors must be feeling some frustration too. The stock is near its 52 week low and is well below its price from a few months ago. Analysts have recently downgraded the stock and cut its target price by over 10%. The company has slipped over 35% from its 52 week high and investors must be frustrated with the company's inability to grow despite the government's bailout. Some estimates conclude that the government has lost $35 billion in its bailout of GM, a staggering number for an idea that was supposed to put American automobiles back on the map.
Competition is posing even further challenges to the American auto giants. Toyota has partnered up with BMW, and is offering its "green car expertise" to a rival for the first time. Ford has previously collaborated with Toyota on hybrid technology, but Toyota will do much more than this with BMW, as the two companies have actually expanded their partnership. Toyota will provide hybrid and fuel-cell technologies to BMW in return for technologies to reduce vehicle weight. Toyota has been solid lately, with a price nearer its 52 week high than low and a PE ratio above the automobile average. People are expecting big things from Toyota and all signs point to its potential to deliver.
Toyota is not the only one continuing to work on green initiatives. Honda is also doing this, as it has become the first to begin recycling rare earth materials from hybrid car batteries. This may appear like an attempt to become more environmentally conscious, but some have noted that this is merely a response to the decreased amount of these rare earth materials in China. Therefore, Honda is merely working to prepare itself for a world where these materials are even harder to come by. Honda stock shot up over 10% in June, as its American sales were up 48.8%. Look for this company to keep solid and reach its target price of nearly $44.
Tesla is a company to look out for, as it has recently begun shipping its electric Model S sedan. The Ford Focus Electric, for instance, has a battery that rates at 105 MPGe, and this is 16 MPGe higher than the Model S battery. The Model S is heavier than the Focus Electric, however, and it supposedly performs better than any previous electric vehicles. This is a huge release in the electric vehicle market, and although Ford will continue to put up a fight, Tesla will likely become an even more dominant player in this industry. Tesla is down from April, but had a good month in June and has several analysts positively enthusiastic about its possibilities.
Especially compared to their foreign competitors, Ford and General Motors are not in a good place, as they have been subject to cuts in projected sales numbers. If you want to play in the auto industry, go international. The American companies just are not showing much sign of life right now, though if GM dips below $20 and Ford below $9, they may only have enough room to go up. But that's no guarantee and certainly not a guarantee of healthy profits both of which the international companies, especially Toyota seem to offer right now.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.