GM Trading Higher -- Is it a Better Buy than Ford?

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

For the first time since General Motors’ (NYSE: GM) IPO, the stock is trending higher, and investors are optimistic that the trend might continue. The stock has rallied 14.25% in the last month, with more than half during the first three days of last week. With that being said, and GM trending higher, is it time to buy, or perhaps take profits? And which stock is more attractive, GM or Ford (NYSE: F)?

Auto Industry at a Glance

Despite GM’s recent gains, the stock is still trading with a near 30% loss since it began trading at the end of November 2010. Back before the company’s IPO it was a stock in high demand, as it was presenting solid value compared to the overvalued social media IPOs. According to Reuters, there was $60 billion in orders to buy shares in the GM IPO. Most analysts believed it was priced too low, and almost everyone thought the buy price was a good deal, yet the stock has been unable to gain momentum.

When assessing the current price of GM I think it is important to reflect upon its IPO, and the perception of investors. Back in 2010 it was considered a cheap stock, and since then auto sales have grown and have become one of the few bright points in the economy. Yet the industry as a whole consists of high-beta stocks that are directly tied to the performance of the economy and the direction of the market. In other words, the auto history has been booming, yet stocks have traded lower. It doesn’t matter that auto sales are at multi-year highs.

The price and performance of auto stocks is directly tied to the performance of the market. When it trades lower we associate the auto industry with weakness in the market, despite the auto industry arguably being our greatest asset. This is not my opinion, this is a fact, and there is nearly two years of proof in shares of GM and Ford that shows that when the market trades lower, even by a small margin, the auto industry and the banks are the first to fall.

Some might ask, “If the auto industry is so strong, then why would it be so quick to fall?” In my opinion, it’s because of the fear factor and the lack of performance that occurred during the recession, which was only four years ago. The industry crumbled, therefore despite its recent strength, its innovation, and the complete change in direction, these stocks are negatively affected, as investors are much more cautious following the recession regarding their investments.

GM Performance

Lately I have begun to entertain the possibility that GM could trade higher and break out into a new range. The company is hiring, its sales are rising, and its valuation is among the best in the market. Its rally during the last few days has been a result of September auto sales, which were the highest since 2008. The company grew sales by 1.5% during the last month, driven by car sales, which were up by 29%. The only weakness came from sales of the Silverado, which was down 16.6%; yet everyone knows the company is preparing to unveil the new Silverado and consumers are waiting for this new model.

The bottom line is that General Motors is a great company, but has been a horrible stock. Although the company’s September auto sales were very impressive, there are some headwinds facing the company. It recently announced a recall of 41,000 cars, there are constant issues with unions, Europe, and let’s not forget the “Government Motors” label. Overall, it has outperformed Ford in terms of performance and growth, but is it a better buy?

GM compared to Ford

When you look at the fundamentals and stock metrics of GM you might think it is a clear buy – and as a long-term investment it is a great investment – but at first glance when compared to Ford the stock may look expensive. So let’s take a quick look!

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p>GM</p> </td> <td> <p>Ford</p> </td> </tr> <tr> <td> <p>Market Cap (billions)</p> </td> <td> <p>$38.4</p> </td> <td> <p>$38.1</p> </td> </tr> <tr> <td> <p>Revenue (billions)</p> </td> <td> <p>$150.08</p> </td> <td> <p>$133.28</p> </td> </tr> <tr> <td> <p>Price/sales</p> </td> <td> <p>0.25</p> </td> <td> <p>0.28</p> </td> </tr> <tr> <td> <p>Net income (billions)</p> </td> <td> <p>$4.69</p> </td> <td> <p>$17.70</p> </td> </tr> <tr> <td> <p>P/E ratio</p> </td> <td> <p>8.74</p> </td> <td> <p>2.26</p> </td> </tr> <tr> <td> <p>Forward Ratio</p> </td> <td> <p>6.16</p> </td> <td> <p>6.72</p> </td> </tr> <tr> <td> <p>Cash (billions)</p> </td> <td> <p>$32.61</p> </td> <td> <p>$23.79</p> </td> </tr> <tr> <td> <p>Debt (billions)</p> </td> <td> <p>$14.79</p> </td> <td> <p>$99.90</p> </td> </tr> <tr> <td> <p>Operating Cash Flow (billions)</p> </td> <td> <p>$9.92</p> </td> <td> <p>$9.54</p> </td> </tr> </tbody> </table>


With Ford’s stock unable to break from the $10 range, and GM trending higher, a lot of investors have suggested that it’s time to buy Ford because it is cheaper. But according to the fundamentals and stock metrics above, Ford is not cheaper; it is actually near equal.

The first metric that “pro-Ford” investors mention is its P/E ratio compared to GM. However, when comparing both companies it is better to look at forward ratios, because Ford’s P/E ratio of 2.26 takes into account its special item in Q4 of 2011. In case you don’t know, in Q4 of 2011 Ford had a one-time, non-cash special item of $12.4 billion from the release of the valuation allowance against net deferred tax assets. Therefore, the company earned $5.3 billion over the last 12 months, not $17.70 billion. In all fairness, this still gives Ford better margins than GM, but the distinction between the two is not as great as it may appear in regards to earnings.

If we compare the companies further, GM is expected to see earnings growth, while Ford’s earnings will decline. Both companies have similar operating cash-flow, which is perhaps even more important than net income. In my opinion, each is attractive as a long-term investment and trades well below its worth. Both companies have certain positives and negatives when compared to the other. Therefore, a long-term investment is a decision of preference rather than a differentiation of value.

Foolish Conclusion

After GM’s trend higher, the two stocks now look equal. I wouldn’t say that either is better than the other, but are different. Ford pays a dividend and doesn’t carry the burden of being partially owned by the government. However, since Ford didn’t take the bailout, it also has nearly $100 billion in debt, although it’s important to mention that it has cut its debt-to-assets ratio each year since 2008. GM did see strong September sales despite slow sales of the Silverado. However, Ford has strong long-term guidance: the company predicted sales growth of 50% last year during its mid-decade report (through 2015).

With both stocks having a similar forward ratio, price/sales, strong operating cash flow, and encouraging guidance, I think both would make a great long-term investment.  However, with the market trading at multi-year highs it does look as though downside is possible, if not likely. If the market trades higher, then GM is trading with more momentum and could create new 52 week highs very quickly.

Ford, on the other hand, can’t consistently cross the $10 mark, and has remained in this range for several months. Therefore, if the market trades higher I think GM has the most short-term upside, due to momentum. But long-term, I think both companies have equal upside, with similar metrics and fundamentals. With all things considered, I think GM is the better stock. It has greater short-term upside, and with both companies having near equal upside long-term it makes more sense to invest in GM. The key moving forward is to remember that both companies are undervalued compared to fundamentals, but unfortunately, the short-term direction is dependent upon the market. Therefore, be careful if you’re a short-term trader, or buy for value if you’re a long-term investor, but perform your own due diligence either way.

All fundamental data was collected from Yahoo! Finance

Dig Deeper

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BrianNichols owns shares of Ford. The Motley Fool owns shares of Ford. Motley Fool newsletter services recommend Ford and General Motors Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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