New Reasons To Avoid GM And Ford Altogether

Includes: F, GM, HMC, NSANY, TM
by: IncomeHunter

Despite the suspected decline in the Chinese economy, active motor companies posted extremely high June sales figures for that part of the world. Both Ford (NYSE:F) and General Motors (NYSE:GM) saw increases above analysts expectations, and yet their falling numbers continue. I don't expect either company to post healthy numbers for the third quarter of 2012. Moreover, with other international companies such as Honda (NYSE:HMC), Toyota (NYSE:TM), and Nissan (OTCPK:NSANY), doing well, the American companies are to be avoided, despite the numbers from China.

Both Ford and GM posted record sales in China for the month of June. China remains one of the strongest emerging markets for car manufacturers. Tapping into its growth is necessary for international presence. Take China's 2011 numbers, with total auto sales up over 40% from 2009. American brands have risen slowly, but steadily since 2008, though the market is still dominated by Asian manufacturers.

But it must be noted that there will soon be a significant slowdown in the country's economy, as predicted by analysts. Despite this news, and despite the fact that most major cities in China have introduced new limitations "on new car sales to ease gridlock and address poor air quality" the two major American car companies hit their record highs. GM's sales were up in June by 10% as compared to the same time last year, and Ford's sales were up by 18% in China. Still, Ford doesn't come close to GM in terms of being a real competitor in the market. Even though Ford is expanding in the country, and even though its sales numbers are ever increasing, it is still trying to reach GM's numbers from years ago.

If the economy does indeed slow down, Ford may luck out that it hadn't invested so deeply in the world's largest country. Still, for now, numbers are up and Ford has not been a strong presence in the market. Over the month of June, Ford experienced a decline of more than 5% in its stock prices. It's 2Q numbers are estimated to come out down about 5% since 2011. Its EPS is dropping and some analysts have it as going as low as 0.4 for the third quarter of 2011. That's not good news for Ford, as its profit margins, which shot up in the 4th quarter last year, have fallen back toward 0%. Gross profits were down 10% in the first quarter (from 2011) and if international sales can't buoy these numbers, it will be a mystery what might.

GM has shown a similar trend, though it is faring better than Ford. Stock prices in GM declined by more than 10% over the course of June this year. It seems that investors may be more concerned about the potential slowdown in the Chinese economy than they are about the healthy June numbers. But GM's gross profits have stayed fairly even (despite an atypical 2Q in 2011). Its revenue numbers are consistent with where it was in 2011 and though its profit margin hasn't returned to the level of last year, it is rising from the end of 2011. With an EPS currently over 3, there's still a reason to stay with GM, though it's not a strong one. Analysts are estimated that earnings per share will fall as will its price to book value.

Some of Ford and GM's major competitors also showed an increase in sales in China of late. In June, Nissan sales increased 10.3%, in comparison to the same time last year. Other competitors have also benefited. Honda experienced a whopping increase of 84.2% since June last year and Toyota also posted an increase in sales in China of 18.6%. Correspondingly, Nissan stock experienced a rise of close on 4% over the course of June, possibly as a direct result of the marked increase in sales. Likewise, both Honda and Toyota experienced increases of close on 5% probably for the same reason. Of these, Toyota is the strongest buy right now. Analysts estimate earnings in the range of 60% from its point last year. Third quarter estimates have another strong quarter, with estimates of near 15% growth. Its first quarter gross profit numbers were up over 20% from 4Q 2011 and up almost 50% from its first quarter numbers in 2011. That's impressive and I expect strong numbers to continue as news broke recently of it signing a deal with Peugot to sell cars in Europe.

GM and Ford posted decent numbers in a market that both want to tap into. We should be excited. But we're not. With revenues not going anywhere, profit margins trending only slightly upward, there's not a lot to like here. Neither company has a particularly good earnings per share ratio, and yet I can't say that either is particularly undervalued. Simply put, the international companies look better and until GM or Ford can overtake their market share, sales increases in countries even as big as China just won't matter too much.

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