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The Revival of U.S. Automakers

September 11, 2013 | About:
Patricio Kehoe

Patricio Kehoe

7 followers
After the financial crisis of 2008 to 2009, the U.S. auto industry was in ruins, to the point that some firms were dependent on government bailouts to stay in the race. Few would have thought that a couple of years later, companies such as Ford (F) and General Motors Company (GM) would be making earnings in the double digits. Nevertheless, sales reports from August suggest that these companies are back on track and doing better than ever.



Up from the Ashes
[/b]

Emerging from the bankruptcy of General Motors Corporation, General Motors Company started doing business in July 2009. Despite setbacks, the firm continued to be the market leader in the U.S., with around 18% share in 2012. And on Thursday, General Motors will be debuting two new generation models of the Tahoe and the Suburban, in an attempt to continue its current success story.

General Motors is set to report great earnings over the next few years, as the U.S. auto market recovers. With a whole new array of vehicles, considered to be of the best quality and design in decades, the firm is set to increase its sales volume. Revenue is also bound to increase, since positive car reviews enable the company to charge more for its products without losing customers. The Buick LaCrosse for example is selling at $7,800 more per unit than in 2009. Opposite to past times, overproduction is no longer necessary for General Motors to cover high labor costs. This allows the firm to operate in a demand-pull model, where production is designed to meet demand and even breaking points are hit even in low economic cycles.

Hence, it comes as no surprise that General Motors’ sales have reached their best, since September 2008. The company seems financially strong, with revenue climbing and high levels of cash at hand for future investments. In addition, General Motors is trading at 10.3 times its trailing earnings, resulting in a significant discount to the industry average. It really comes as no surprise that world-renowned guru Warren Buffett of Berkshire Hathaway recently increased his stake in the company by 60%.



[b]Building on Common Ground
[/b]

The iconic Ford Motor Company, which owns brands such as Ford and Lincoln, has about 16.5% of the market share in the U.S. and 8% of the European market. The company focused primarily on Sport Utility Vehicles, yet high gasoline prices have steered efforts towards the production of quality, fuel-efficient vehicles. As of late, Jean-Marie Eveillard of First Eagle Investment Management increased his stake in Ford, which makes me feel optimistic about this stock. Having won several prizes for its vehicles only reinforces my confidence.

Building common vehicle platforms is one of Ford’s recent achievements that will continue to benefit the company in coming years. By 2016, the firm expects 99% of its global production to come from nine platforms, compared to the 27 it had in 2007. Improving economies of scale will allow Ford to switch production quicker and cut costs dramatically. In addition, the firm has achieved labour costs similar to its foreign rivals after the collective bargaining agreement with the United Auto Workers. This agreement continues to save Ford billions of dollars, as it is no longer responsible for retiree health care. Furthermore, the company projects global sales to increase 50% by 2015, due to the growth potential in China and India.

Financially, Ford is not particularly strong. Since it did not receive government loans, the firm had to take on a huge level of debt in order to roll out new models and continues to do so . Its operating margin is also down, as the company is selling increasingly less-profitable small cars, instead of large-margin trucks. Ford is currently trading at 11.4 times its earnings, resulting in a reasonable discount to the industry average. Despite some financial uncertainties, I am confident that the U.S. automaker is on the right track.

[b]U.S. Automakers Back on Track


Although the U.S. auto industry is still recovering from the setbacks of 2008 to 2009, a clear upward trend is emerging. Both General Motors and Ford have increased their sales, improved their finances and once again become competitive. I believe both these firms will fare well in coming years, yet Ford seems to have the edge, as it already competes in the fuel efficient car segment, even offering hybrid vehicles.

Disclosure: Patricio Kehoe holds no position in any stocks mentioned.

About the author:

Patricio Kehoe
A fundamental analyst at Lone Tree Analytics

Rating: 3.9/5 (7 votes)

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