Ford And GM: Expect Stable Returns This Year

Includes: F, GM
by: Vatalyst

The financial crisis of 2008 saw U.S. automakers scrambling to restructure and rebuild a business that was plagued by corporate and operational inefficiencies, rising fuel costs, and fierce competition from foreign automakers. Both General Motors (GM) and Ford Motor Company (F) restructured, as General Motors benefited from the government bailout money, and Ford used the $5.9 billion dollars it received to revamp factories. Both companies have delivered consistent sales growth since 2009. In this article, I will look at the investment opportunities these two companies currently offer.

General Motors currently trades around $25, between a 52 week low of $19 and high of $33.47. The price to earnings ratio is 5:60, earnings per share are $4.58, and the company does not pay a dividend. The market capitalization stands at $41.16 billion, and the company has total cash of $31.65 billion and total debt of $13.84. The book value per share stands at $17.72. Of the outstanding shares, 36.50% are owned by institutions and 53.55% are owned by insiders, leaving the float of approximately 13% in the hands of retail investors. The U.S. Government owns 26% of the issued common stock.

In its latest fourth quarter report, General Motors announced that its vehicle sales were up 1.1%. General Motors reported net income for 2011 of $7.6 billion. The increase was attributed to a stronger economy and new models. Year over year passenger car sales were up 13%. The report also stated that the commercial deliveries increased 35% in February. Vehicle sales are an indication of improvement in the economy as a result of better access to credit and an increase in consumer spending. Earnings of $4.58 per common share in 2011 were up from $2.89 per share in 2010. Revenues in 2011 increased 11% from 2010. Fourth quarter 2011 revenues increased 3%, compared with the fourth quarter of 2010.

General Motors international showed EBIT of $0.4 billion in the fourth quarter of 2011, compared with $0.3 billion from the same period in the previous year. General Motors South America reported an adjusted loss of $0.2 billion in the fourth quarter, which included $0.1 billion in restructuring cost. Full year South America reported a loss of $0.1 billion in 2011, compared to a gain of $0.8 billion in 2010.

The company indicated capital expenditures will be in the range of $8 billion for investment in new products and technologies. General Motors expects to increase its revenues in the next year, while containing pricing and inflation. The company expects that its product mix and pension expenses will remain unfavorable.

Ford currently trades around $12.50, between a 52 week range of $12.40 and $16.18. The price earnings ratio is 2:52, and earnings per share are $4.94. The dividend yield is 1.60%. The market capitalization is $40.16 billion. Ford has total cash of $22.75 billion and total debt of $99.49 billion. Book value per share is $3.95. Institutions hold 54.4%, while insiders hold 0.34%, leaving approximately 45% in the hands of retail investors.

Fourth quarter 2011 results for Ford show higher sales, net revenue, and a strong performance overall in North America. Net income for 2011 was $20.2 billion, compared to $13.6 billion in 2010. The company's per share earnings in the fourth quarter of 2011 were $0.20. Full year earnings were $1.51 per share.

The company expects to capitalize on 2012 economic growth in the U.S. projected to be between 2% to 3%. The company expects growth in Europe to be hampered by ongoing economic issues, primarily due to an increase in commodity prices.

Ford's market share in the U.S. was 16.5% in 2011, up from 16.4% in 2010. South America was 9.8%, up from 9.3% from 2010. Europe was 8.3%, down from 8.4% in 2010. Asia Pacific and Africa were at 2.7%, up from 2.4% in 2010.

Ford's sales in the U.S. are increasing, while they are decreasing in Europe. Ford needs to apply more operational cost cutting measures to achieve economies of scale in Europe. Ford will expend $1.3 million in 2012 on an assembly plant in Hermosillo, Mexico, creating 1,000 jobs. This plant has been in existence since 1986, and currently employs 2,700 people. Ford became Mexico's premier car exporter in 2011. Overall exports from Mexico in 2011 were 2.14 million a 15.3% increase from 2010.

In looking at the auto industry as a whole, U.S. new vehicle sales in March are expected to rise 6% to 14% over last year. A strong demand in the retail market is responsible for this increase. Demand for smaller cars is increasing as rising gasoline prices are sending consumers in that direction.

Since 2008, there has been a 12% reduction in dealers. With the increase in sales and profits, dealers are now re-hiring salespeople and service technicians, while also increasing spending on local advertising campaigns. Job creation in the auto industry is a harbinger of better times to come.

Sales of cars and light trucks worldwide in 2011 reached 12.8 million units, an increase of 10.3% from 2010. With Europe's economy still remaining soft, noticeable percentage improvements are not likely to happen in 2012. Ford sold 2.14 million cars and light trucks in 2011. General Motors sold 2.5 million cars and light trucks in 2011. General Motors had a 18.2% market share in February 2012, and 18.3% year to date. Ford had a 15.5% market share in February 2012, and 15.6% year to date. General Motors' year to date sales are negative (2.2%) in 2012.

Barclay's Capital forecast for new vehicle sales in the industry is 14.5 million units in 2012. Of that number, 53% are expected to be passenger cars and pickups, while SUVs will comprise 47%. This is compared to 51% for SUVs and pickup trucks, and 49% in passenger cars in 2011.

Ford has executed its turnaround by cutting operating costs, introducing new gas efficient products, and improving overall efficiency. General Motors has executed its rise from the ashes by adhering to much of the same plan, albeit with the support of the federal government. Each company has pared down its corporate and operational expenditures, streamlined its product lines to better suit an economy with rising fuel prices, and has introduced new products that will suit consumer needs in this economy. Both companies are making expenditures aimed at creating jobs. General Motors showed good corporate citizenry in distributing profits to its hourly employees. Ford distributes a dividend to its shareholders as a reward for loyalty.

The economic conditions in Europe remain largely unchanged, and it is not likely to fuel any growth in either of these companies in the near term. Ford is focusing on Mexico and South America to bolster U.S. sales. General Motors is looking toward China to increase its top line revenues. In 2011, General Motors sold more vehicles in China than in the U.S. Both are demonstrating that the restructuring efforts are showing great results in terms of sales and earnings growth.

Neither company is predicting a breakout year in 2012, but both anticipate that sales in the U.S. will continue to grow and hold up any negative impact from economic turmoil in Europe. After delivering positive results, it is likely that institutions will pay closer attention to accumulating Ford shares and increasing holdings in General Motors. I expect 2012 will be positive year for the auto industry and shareholders of industry stocks. I recommend buying shares of General Motors and Ford today.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.