The Automaker's Recovery

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

For several years now, unloved, reviled, castigated, the automakers languished, were bailed out (save one) and largely shoved out of portfolios.  The past year has signaled recovery for some, and a concerted attack on their serious problems.  One stands out as a soon to be loved, well managed and led, money-making machine.  It is actually getting its elephant (gargantuan business) to dance!

Most problems remaining get focus


After a struggle to survive, the big three are beyond immediate danger, two General Motors (NYSE: GM) and Chrysler by government intervention, and Ford (NYSE: F) by its own good management.  GM and Ford have made dramatic improvements in finance, product selection, and quality. 

Ford continues to work aggressively on its pension liability problems and its European losses as it bootstraps itself out of the abyss and generates earnings to pay for repairs.  GM is making progress at a less rapid rate on these same problems with perhaps less of a mountain to climb following its bailout forgiveness.  Ford looks to have trained the elephant to dance with its One Ford product concept and now just needs to keep playing the music - execute.  GM seems to be on the same track, less surely, and its elephant still kicks some customers. 

<table> <tbody> <tr> <td>As of Q2 2013</td> <td>Ford</td> <td>General Motors</td> </tr> <tr> <td>Pension Liability  12/12</td> <td> $18.7 Billion</td> <td> $ 27.8 Billion</td> </tr> <tr> <td>Q2 Contribution to Pension Liability</td> <td> $ 1 Billion</td> <td> $ 100 Million</td> </tr> <tr> <td>Europe Losses</td> <td> ($348 Million)</td> <td> ($100 Million)</td> </tr> <tr> <td>Market Cap</td> <td> $66.9 Billion</td> <td> $50.4 Billion</td> </tr> <tr> <td>Q2 EPS</td> <td> $ 0.45</td> <td> $ 0.84</td> </tr> <tr> <td>P/E</td> <td> 11.8</td> <td> 12.8</td> </tr> </tbody> </table>

Nursing a grudge - a problem GM hasn't touched yet and may not repair

GM has one more critical problem than Ford: grudges. 

There are a large number of potential customers and investors who won't touch GM products or shares as long as the balance sheet reads: GM +$16 billion, Taxpayer -$16 billion, yours truly included.  You may argue if its right or wrong, fair or unfair, deserved or not, it exists and GM will need to do something about it to stay No. 1 in the US - if they still are No. 1.  By some measures, Ford is the number one automaker in North America right now, just nobody knows it.

Grudges are very hard to measure, prove, or judge the effects of. To know they are real, however, is a simple matter:  just read the commentary on Fool John Rosevear's recent articles on GM, particularly Why GM Hasn't Repaid Taxpayers.  The venom and number of potential investors/customers willing to express themselves on the GM bailout and why GM hasn't (and may never) repaid the taxpayers is impressive.  It ought to alarm GM and GM shareholders.

Where Ford is already the No. 1 automaker in America

By the time most investors and customers find out Ford is the number one automaker, most of the recovery in Ford's share price likely will be complete.  There is some debate and fluctuation in the number one selling auto and truck, but recently many believe them to be the Ford Fusion and the Ford F-150. 

What is unmistakeable would be Ford's dominance in operating margin: Ford at 10.4% and GM trailing at 8.4%.  Some would not include any measure of how Ford or GM treat their shareholders, but I do.  Ford's dividend yield is 2.3%; GM's is nada, as in zero.  Then there is the obvious Ford lead in market cap, as well as reports that customers are flocking to Ford's products, to the point that keeping up with demand is a worry.  This all equals Ford creating value at a dramatic pace and fixing its major problems faster than GM.  Sooner rather than later, that trajectory makes Ford No. 1.

Numbers are nice, what about the ground game?

Just to check on the real picture behind the numbers, I went off to test drive what I believe to be my next auto, a Ford Fusion Hybrid.  I'm not much of a "motor head," I tend to the utilitarian view, which is why my 99 Subaru Outback made in Indiana has 397,000 miles on the odometer (no fooling).  I was particularly impressed with the fit, finish and handling of the Fusion.  It's easy to see why its selling well.  Ford is even sending its owners a "software upgrade" attempting to improve mileage, and this is a first for an automaker I think.  Way to take care of the customers, Ford. 

Is there a Ford in your future?  There is still time to add Ford to a portfolio at a reasonable P/E of 11.8 and perhaps closer to 10 on a pullback with a dividend yield over 2%. Ford leadership is aggressively focused on fixing the remaining problems, executing well and taking great care of its customers and shareholders.  That's why I am long Ford, the taxpayer's friend.

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Charlie Wagner owns Ford.   The Motley Fool recommends Ford. The Motley Fool owns shares of Ford. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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