By: Marshall Hargrave
Ford Motor Company (F), the manufacturer and distributor of automobiles worldwide, is down over 11% during the last twelve months, but has had a mixed year in terms of stock performance. After a solid rally during the beginning of 2012, the company has since been under pressure due to European weakness.
Ford's 2Q EPS results came in at $0.26 versus $0.59 a year earlier, with European operations posting a loss of $404 million. As a result of continued European weakness, 2012 EPS estimates have been lowered from $1.47 to $1.28. Yet, the company continues to post strong North American market performance, with pretax operating profit up 5% from last year. The auto industry as a whole is expected to perform well in the interim with overall global demand expected to rise.
Both Ford and General Motors Company (GM) are seeing the most pressure from Europe, while Japanese automakers, such as Honda Motor Co Ltd (HMC) and Toyota Motor Corporation (TM) are increasing their production coming off the crises in Japan over the past year. Other notable competition includes the electric vehicle manufacturer Tesla Motors Inc (TSLA). The auto industry should see an increase in cars sales volume driven in part by replacement purchases, as the average vehicle age is now up to 11 years old.
Honda and Toyota are two of the car companies expected to see a boost in sales volume, revenues and production as inventory levels and spending rebound from the 2011 Japanese earthquake and tsunami. However, a strengthening Yen against the Dollar and Euro, especially on the back of QE3, will squeeze margins in the U.S. and Europe for the Japanese companies. Honda's migration toward more smaller, fuel-efficient vehicles, should give it an advantage over its Japanese peers in the U.S. markets. Honda is expected to earn $3.47 per ADS for 2013, up from ADS of $1.49 in 2012. For Toyota, the company's increased product mix will drive ADS up to $6.51 in 2012, compared to $2.29 in 2011.
It appears that funds are still hesitant on the Japanese automakers outlook, as only a few top names are owners, with very modest positions at that. D.E. Shaw and Jim Simons were the two top fund owners in Honda at the end of 2Q, but the shares held represented only a few million dollars versus the backdrop of their several billion dollar funds. The same is true for Toyota, with Israel Englander owning the most shares at only 44,000.
Tesla is down almost 10% over the past couple weeks on a restatement of Model S vehicle sales targets. On the news, Needham cut its estimates, with analyst Michael Lew stating that quality is more important than quantity at this stage, but admits that the magnitude of Tesla sales shortfalls for 3Q and 4Q will be much lower than anticipated due to supplier and operational issues. Needham cut EPS from a $2.47 loss to a $2.90 loss in 2012. The company did see Cadian Capital increase its stake over 250% to over 3.2 million shares, and as of 2Q, Tesla made up over 3% of Cadian's 13F portfolio. The Tesla CEO has also given the company a vote of confidence with recent insider purchasing.
The 2Q results for GM were similar to Ford's, being down from $1.54 to $0.90, and a European operating loss of $361 million. The company has seen its 2012 EPS estimates cut from $3.49 to $3.16. Two top funds are currently going head to head in the Ford versus GM car battle. Billionaire David Einhorn is backing GM, being the top fund owner by shares with 17.4 million shares. Einhorn's 2Q position made up over 5% of his firm's 13F portfolio, while Legg Mason is a top name owning Ford. Also worth noting is that both of these funds upped their 1Q stake in their respective companies by 18% each.
Last month, S&P lowered Ford's price target to $12, but made note that the company still deserves to trade above its peers on a multiple basis, given the improved perception of Ford vehicles and the rise in U.S. auto demand. The company currently trades around $10.
Ford's stock has been under the most pressure, especially when compared to its top rival GM. Ford is down 7% year to date, while GM is up 20%. Compared to its peers, Ford trades at a discount to its peers on both a P/E and P/S basis-Ford trades at a P/E of 2.3 and a P/S of 0.3, compared to its peer averages of 12x and 0.4x, respectively. Even with Ford's forward P/E ratio expected to be 7, it still remains below its peers and we believe it could be a solid buy at current levels.