Don't Give up on Ford, GM Just Yet

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

It's always easy backing blue chip stocks. However, reward has been shown to be concentrated more in riskier assets, which tend to be overly discounted. Surprisingly, there are a few stocks out there that actually have good fundamentals but have investors on the fence. As the economy improves and operations continue to succeed, it is only a matter of time before the market corrects the discount.

Several Reasons to Be Bullish on Ford (NYSE: F)

One begins to wonder whether the market has completely lost it with Ford Motor, one of the world's most iconic companies. Though it has bounced around 25% from the 52-week low, it's valuation is still incredibly compelling. The $40.9 billion company generated $4.4 billion in free cash flow over the twelve trailing months ending 3Q12. While this has been trending downwards since December 2009 ($11.4 billion), the 10.8% yield is exceptionally high for such a resilient producer. Ford will have some up and downs, like any high beta-stock, but the long-term trajectory is strong.

Benchmarked against expectations, Ford has also done quite well for itself. Except for the 4Q11 miss, performance has been excellent. In the third quarter, EPS of $0.40 came out 33.3% ahead of expectations. I am also optimistic about future operations--the basis from which I make most of my investment decision. The partnership with Mazda to invest $37 million extra in China makes sense--the company has seen surging sales in this emerging market. Moreover, demand has been so terrific in Asia-Pacific as a result of the Focus model that management has added more shifts in Southwest China. In addition, the EPA's criticism of Hyundai's fuel economy claims will help Ford gain market share through promotion of the 2013 Fusion sedan. The new Escape model also has reportedly seen positive results.

Fortunately, management has taken proper steps to adjust production to meet better-than-expected demand. The implementation of five global platforms will help boost volumes while lowering costs. More shifts and quicker line rates should also lift the bottom line as soon as this quarter. And the decision to build Transit Connect Wagon--a fuel efficient, lean cut 2013 car--in Spain and not in America will help bring down manufacturing costs. On a more political level, some talking heads have argued that the fiscal cliff will cause a 3% dip in auto sales--I believe, however, that this has already been factored into the stock in light of 911 bps underperformance against the S&P 500 YTD.

More Than Just Cash, General Motors (NYSE: GM) Is Fundamentally Strong

General Motors is another strong company that has been under-appreciated by the market for lack of a good reason. It trades at 9.3x and 6.6x past and forward earnings, respectively. The PEG ratio is well below 1 at 0.82x (indicating future growth has come nowhere close to being factored into the stock price), and the price-to-book ratio is also below 1. Analysts are pretty much calling this a "must buy" stock with a rating of 1.9 out of 5 where "1" is a "buy."

There are several reasons why I am optimistic about GM. First, the $4 billion deal with Ally Financial to buy international assets showcases a strong focus on high-growth regions. In general, management has been transitioning assets over to China. This was revealed perhaps most clearly by the decision to cut the staff in South Korea. Double-digit global sales for Volkswagen also failed to outsell GM--a sign that the US automaker has a competitive edge. If the business were truly in a tailspin, this would not be occurring. Furthermore, even in Europe, the company has an optimistic outlook. The CEO will be potentially partnering with Peugeot to build an economy of scale in the region. This will lower marginal costs and put the company on, of course, a more profitable course.

It doesn't take much for GM to surge in value. Assuming it meets expectations, 2016 EPS will come out to $5.15. At a multiple of 12x, this translates to a future stock value of $61.80. Discounting backwards by 10% yields a present value of $38.37. This is a 56% premium to the current market assessment and more than enough to justify making an investment.

TakeoverAnalyst has no positions in the stocks mentioned above. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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