The 2 Auto Giants
prabha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Two American automaker Ford (NYSE: F) and General Motors (NYSE: GM) are having a tough time where sales are concerned, thanks to weak European performance. However, when it comes to stock valuation, there is a completely different story to tell.
General Motors has recently greatly reduced costs, this make them much healthier than it previously was. Some may argue that G.M. have $31 billion unfunded liabilities, but one should not forget the cash reserve they have, which makes them in a good position to pay the liabilities off in the future. Also, according to the Treasury Department Ruling GM is allowed to use historical of $18 billion to counterbalance its profit, it doesn't have to pay federal income tax in the coming years. Evidently it has paid only 10% of its income as taxes that too on a global basis. Hence, as long as GM is able to generate positive earnings and free cash flow, liabilities won’t bother it much.
According to David Einhorn the company is set to grow as he expects GM to break even in Europe in the coming three years and also improve their product cycle. However his statement can be questioned as GM at present is performing worse than its competitors in Europe. But assuming that GM keeps it market share it is set to sell around 300k units in the coming years.
The new product line which includes Chevrolet Impala, new Cadillac ATS and XTS, new pick-up trucks and SUVs should help GM to improve its sales and keeping all of this in mind it would be only realistic to assume that the company will obtain a higher market share in U.S.
To conclude – G.M. will grow by 12.5% in the coming 6 months and around 11% in 2013. Therefore if Europe doesn’t get worse and the sales are stable in South and North America, the company looks a profitable venture for the investors.
Nightmares continue for Ford as its European sales continue to decline. It is down over by 11% during the last twelve months and in September S&P lowered its target price to $12. Inspite of these happenings there has been mixed reactions in terms of stock performance. Ford's 2Q EPS results were at $0.26, with European operations posting a loss of $404 million. Last year it was $0.59. However the company looks strong in North America, with pretax operating profit surging up by 5% as compared to the previous year. Also, the market share for Ford grew by 2.2% which is sending a bullish sign to the investors. Ford is trying to execute its strategies well and if all goes right, it should launch 15 new vehicles in the next 5 years. The product range will comprise of passenger vehicles, multi-activity vehicles, SUVs and pickups. But it is essential to note that Ford has a double digit decline in sales. This news has certainly put its stock in much pressure. It is losing out to its arch rival GM whose stock is up by 20%. Ford is currently trading at a P/E of 2.3. The stock is currently trading at a cheap multiple of 6x and offering a dividend yield of 2.23%.
Given the facts, it still remains below its peers and at the current levels looks a good buy.
Interested in Additional Analysis?
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