GM-Ford rivalry extends to choosing sides in stock market
Loyalties run deep when it comes to domestic car brands.
Some would rather push a Ford than drive a GM. To others, a GM in the
driveway is a glistening thing of beauty.
But when it comes to deciding between Ford and General Motors stock,
emotions have no place.
Investors hoping to bet on the anticipated recovery of U.S. auto sales
are weighing if Ford (F) or GM (GM) deserves a parking spot in their
portfolio. Now that GM has emerged from bankruptcy and has been publicly
traded again for three weeks, the decision of Ford vs. GM stock is back.
Choosing between the stocks requires seeing how the automakers match up
on stock valuation, strategy and positioning in the marketplace. "It's
impossible to analyze GM without comparing it with Ford," says Jason
Alper, analyst at BTIG.
Thanks to cost-cutting and, in GM's case, a trip to bankruptcy court,
both companies say they can sell cars profitably even if U.S. car sales
stay soft next year. Still, while both stocks are plays on increasing
car demand, the companies are in very different places and there are
countless considerations for investors to deal with. To help, here are
the cases for both Ford and GM stock.
The case for GM
GM is back on Wall Street, but it looks very different this time. Key
changes during the restructuring make it a compelling investment despite
its troubled past, Alper says.
Trading less than $2 above its initial offering price of $33 a share
makes GM a value, Alper says. GM's stock price could be $47.50 in a year
based on his estimates of what the company might earn next year, he
says. Alper estimates that even with a tepid recovery in U.S. car sales,
GM can earn $5.30 a share in 2011, up from just 24 cents a share over
the past 12 months. If he's right, that would give GM a
price-to-earnings ratio of 6.5, which is well below Ford's expected 8.1 P-E.
During the bankruptcy, GM slashed its pile of long-term debt from $100
billion to less than $5 billion and shed four large divisions, including
Saab and Pontiac. Those changes plus renegotiations with the union mean
GM saves several hundred dollars of costs per car sold, he says.
So even if GM continues to lose market share in the U.S., it can break
even if only between 10 million and 11 million cars are sold in the
country yearly. That's a much easier hurdle than the nearly 15 million
to 16 million in yearly U.S. car sales GM needed just to break even
before, Alper says. "This is a massive positive change to the cost
structure," he says.
The knock against GM
Some consumers, disgusted by the bailout, have "crossed GM off their
list," says Efraim Levy, stock analyst at Standard & Poor's. Also, based
on Wall Street estimates, GM is expected to earn $3.90 a share next
year. Based on that, GM investors are paying $8.83 for every $1 in
expected earnings. That's a premium to the $8.14 investors are paying
for every $1 of earnings Ford is expected to generate in 2011, Thomson
Reuters says. Levy rates GM a hold, as well as Ford. "I'm not buying at
these prices," he says.
The case for Ford
Even though the U.S. car market plummeted in 2009 to its worst year
since the early 1980s, Ford didn't take government bailout money.
That might just sound like a point of company pride, but Ford's strength
amid the crisis has spurred many car buyers who might not have
considered Ford before to take a look at its products, says William
Selesky, analyst at Argus Research, who rates Ford a buy. Much of Ford's
gains have come at GM's expense.
Meanwhile, while GM had to focus on restructuring, Ford has already
tuned up its product lineup and has vehicles U.S. consumers want, says
Steven Dyer, analyst at Craig-Hallum Capital. "Long term, Ford is where
I put my bet," he says.
The knock against Ford
Ford's recovery hasn't gone unnoticed by investors, who have pushed the
stock up 67% this year to $15.94. Furthermore, the company will need to
compete against GM, which has shed a massive chunk of debt and has some
lingering tax benefits. After such a run in the stock, S&P's Levy cut
Ford to a hold rating because there's not much upside to his one-year
$17-a-share price target.
But above all, this is a battle that will be settled in the dealers'
showrooms. S&P's Levy thinks the U.S. auto sales recovery is just
getting started as consumers replace their aging rust buckets.
"You need to have a vehicle lineup that's well received by the public,"
Selesky says. "That's what it comes down to."
"Your first, last, and only line of defense-a Cohort of Roman Heavy
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