We previously published a five part research analysis report series articulating our thesis as to why we disagree with Berkshire Hathaway (NYSE:BRK.B), (NYSE:BRK.A) with regards to investing in Ford (NYSE:F) versus General Motors (NYSE:GM). After researching, analyzing and evaluation Ford and GM on 24 different factors, we concluded that Ford scored better on all of those metrics and that Ford provided a better potential investment opportunity than GM. Based on the recent performance of Ford versus General Motors, we can see that Ford's strengths are GM's weaknesses and vice versa. Our thesis is that GM has been better at generating total sales growth as well as its performance in the emerging markets of Asia and Latin America while Ford's strengths are its cost management, developed markets of North America and Europe and finance company operations.
Ford's biggest market is North America. Ford North America's Q3 2012 revenue grew by 8.3% on the strength of 2.65% wholesale unit volume growth and higher average selling prices. Although Ford's market share declined by 1.5% on a year-over-year basis, we were pleased that Ford did not resort to deep discounting in order to "move the iron." Ford North America's market share decrease was attributed to the impact of discontinued products such as Ranger and Crown Victoria and as adverse industry segmentation changes for the full-size pickup segment as the F-Series share of the full-size pickup segment was higher compared with last year. Ford North America was also able to hold the line on expense growth as expenses only increased by 4.4% year-over-year in Q3 2012 versus the prior year's comparable period. This resulted in Ford's operating margin increasing from 8.6% in Q3 2011 to 12% in Q3 2012 and enabled its pre-tax profits to jump by more than 50%.
GM's biggest market is also North America. GM North America's unit volume grew by 1.75% year-over-year in Q3 2012 versus Q3 2011. This was 90bp less than Ford and resulted in GM's market share declining by 190bp year-over-year. GM North America was also able to realize similar higher average sales prices in the quarter as Ford North America and this helped GMNA generate 6.7% sales growth in the quarter and 4.9% growth on a year-to-date basis. Despite the fact that GMNA has 20% higher revenue than Ford North America, Ford North America's pre-tax profits are 28% higher than GMNA's due to Ford North America's proactive cost management. GMNA's pre-tax profits declined by 17% due to unfavorable mix of products sold as well as increased costs and other expenses. We can conclude that Ford North America is stronger than Ford because Ford North America had higher unit sales growth, profit growth and significantly higher profit margins than GM North America.
Europe is Ford's second-largest market and we attribute that to Henry Ford II's fondness for all things European. The good news with that was Europe was a high-income, highly developed marketplace for Ford to operate. The bad news is that Margaret Thatcher was right about Europe when she said that the "Trouble with socialism is that eventually you run out of other people's money to spend." We believe that is a major cause of the European debt crisis, especially in weaker European markets like Greece, Italy, Portugal and Spain and we believe that is causing soft results in Northern European markets like Germany, France and the United Kingdom. Industry volume in Europe has declined by 9% year-over-year and Ford's volume declined by 17.4% as the company resisted slashing prices to chase market share. Ford also saw a reduction in its low margin short-cycle sales such as demo sales and dealer self-registrations as well as reduced fleet sales to rental car companies. Ford Europe achieved positive net pricing on both a year-over-year and quarter-to-quarter basis as we continue to focus on profitability at the expense of lower margin sales. Despite the fact that Ford's European revenue dropped by 26% ($2B) year-over-year in Q3 2012, Ford's losses only increased by $162M as the company's strategic transformation program for Europe.
Europe is GM's third-largest market and we attribute that to GM's big push in Asia to offset European weakness. GM Europe is seeing much of the same weakness that Ford Europe is facing. GM Europe had narrower market share, unit sales volume and revenue declines than Ford Europe however GM Europe's losses were slightly larger than Ford Europe's. Ford Europe has 2% less losses than GM Europe in Q3 2012 and 7% during the first nine months of 2012 even though it has ~20% higher sales volumes than GM Europe during the periods. GM entered into an alliance with PSA/Peugeot-Citroen in which GM Europe will transfer most of its logistics activities in Europe to Gefco, a wholly-owned subsidiary of PSA Peugeot Citroen. GM is not the only automaker to earn the nom de guerre of Government Motors as the French government recently offered PSA a €7B loan guarantee. GM Europe's is expected to lose $1.5-$1.8B and we expect this to exceed Ford Europe's $1.5B in losses. We can see that although the European market is suffering through tough economic times, at least Ford can take comfort that it performing better than GM in this market.
Ford's South America results have been weak through 2012 due to increased costs associated with the launch of new products as well as production reductions in Venezuela due to currency restrictions, declines in unit volume sales and negative foreign exchange headwinds due to a weaker Brazilian real. The unit is expected to at least remain profitable in 2012 however at much lower rates than 2011.
GM South America has fared better than Ford South America in 2012. GM South America's revenue has been flat in 2012 for Q3 2012 and YTD 2012 versus the comparable periods last year. GM's pre-tax operating income swung from a loss of $44M in Q3 2011 to $114M in in Q3 2012 on the strength of a favorable vehicle sales mix and vehicle pricing which was partially offset by lower sales volumes and higher operating costs. Last year Ford South America had significantly higher profits than GM South America however this year GM South America has reversed that. We expect that Ford's South American operations will continue to lag GM's for the rest of the year and would not recover its momentum until next year.
Asia and Other International Operations
GM's International Operations are the new crown jewel of General Motors and it is the only area of the company that has double-digit operating margins. GMIO saw its revenues increase by 10.3% in Q3 2012 (11.4% YTD 2012) and reach $6.75B for the quarter and $19.75B for YTD 2012. Revenue increased due to 6% unit sales volume growth as well as favorable vehicle sales mix and pricing efforts. These were partially offset due to unfavorable currency translation from the weak Korean Won and South African Rand as well as unfavorable components, parts and accessories sales of $0.2 billion. This helped its Q3 2012 pre-tax income increase by 89% versus prior year levels and singlehanded resulted in GMIO's YTD 2012 pre-tax income increasing versus YTD 2011 levels. GMIO's H1 2012 pre-tax income had declined 6.3% versus H1 2011 Levels.
Ford's Asia Pacific and Africa division is not as strong as GM's International Operations Division right now but that doesn't mean that things can't change. After all, if Ford South America can see its lead against GM South America evaporate, then Ford Asia Pacific and Africa can eventually catch up to GMIO. Ford Asia Pacific and Africa's revenue increased by 13.5% in Q3 2012 versus Q3 2011 levels and the division's operating income swung from a $43M loss in Q3 2011 to a profit of $45M in Q3 2012. Ford Asia Pacific and Africa's Q3 2012 sales growth was 3.2% higher than GMIO's and it was the one market in which Ford saw its market share increase (2.7% in Q3 2011 to 3.1% in Q3 2012). Ford APA benefited from increased capacity and strong sales of the recently launched Focus in China as well as from the Ranger pickup. T GMIO saw its market share ease by 20bp over the same period and we believe that GMIO shouldn't look back because Ford APA may be gaining on it.
Although Ford Motor Credit's revenue has been soft this year versus last year and although its profits have declined due to increased credit losses and fewer early vehicle lease terminations, we are pleased to see that its pre-tax profits are double that of GM Financial. GM Financial saw its revenue and pre-tax income increase by double-digits due to increased loan balances in 2012 versus 2011. Although Ford Motor Credit is larger than GM Financial and has a stronger credit book than the subprime-focus on GM Financial, we believe that Ford Motor Credit shouldn't look back because GM Financial may be gaining on it.
In conclusion, while GM has recently gained ground on Ford overall, we believe that Ford is still a better automaker than GM. As of right now, we can see that Ford's strengths are GM's weaknesses and vice versa. We believe that investors will go further in Ford than GM because we believe Ford has a stronger management team than GM. We also like the fact that Ford had slightly higher net income in Q3 2012 and in YTD 2012 than GM. Also, we believe that Ford offers more potential than GM because GM had to bequeath its automotive technology to SAIC and is at greater risk of its employees stealing automotive technology and trade secrets. The last reason why we prefer Ford to GM is because Ford's dominant shareholders are the Ford Family while 51% of GM's shares are owned by the U.S. government, the Canadian government and the UAW.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article was written by an analyst at Saibus Research. Saibus Research has not received compensation directly or indirectly for expressing the recommendation in this article. We have no business relationship with any company whose stock is mentioned in this article. Under no circumstances must this report be considered an offer to buy, sell, subscribe for or trade securities or other instruments.