Car companies are in real trouble right now thanks to what Tesla (TSLA, Financial) has been doing to disrupt the space.
Even though Elon Musk's company is currently unprofitable and investors are paying for its future potential, that does not mean it won’t continue to disrupt the entire industry. As such, Ford Motor Co. (F, Financial) and General Motors Co. (GM, Financial), in addition to maintaining their current products, have shifted into high gear to gain an advantage in the electric and autonomous vehicle space.
Personally, I like the look of General Motors' lineup much better, especially the new Corvette. From a business standpoint, however, both GM and Ford look undervalued by the market, with each trading at 7 times forward earnings and just a fraction of their annual revenue turnover.
Ford
Still the most dominate truck manufacturer in the world, Ford generated $4.4 billion in net income on $154 billion in sales over the last 12 months, good for $1.10 per share and funneling another 65 cents to its book value. Since 2009, the company has earned over $15 a share, which compared to its current price of $10.96 would be impressive if it was not for the massive amount of debt it carries to finance vehicle purchases. Both GM and Ford do this, which puts each at risk if the economy falters. Unlike banks, Ford is not too big to fail.
Yesterday, Moody’s downgraded the outlook on Ford to negative from stable, citing “a more challenging operating environment” as Jim Hackett, Ford’s CEO, puts the company through a turnaround plan that includes cutting $14 billion in costs, curbing (no pun intended) low-margin models and investing in the future - electric-powered vehicles.
Long term, this is the best idea. Outside of credit financing, the company’s debt load can easily be gobbled up by its cash if necessary. In other words, Ford is actually in a pretty good position financially. It is one of top 15 corporate bond issuers in the U.S. with investment-grade ratings outside of financial companies.
At this price, barring a complete collapse or major threat of one like in 2008, the stock has a significant margin of safety attached. The company continues to buy back stock, further boosting earnings per share and book value numbers. With the new Trump tax cuts, Ford will likely see more profit flowing in from car sales and the recurring credit interest.
General Motors
Earlier this month, GM raised its full-year earnings guidance to the high end of its estimated range - $6 to $6.50. For 2018, GM expects its core operations to be fairly close to its 2017 performance, which means the company continues to pound out cash without much growth. Like Ford, GM has bounced back financially since 2008.
It is making automobiles consumers are willing to pay more for than in the past, not just because of inflation. GM can focus on producing to meet demand, where its models will do no worse than breakeven at the bottom of the economic cycle. This is good news considering we are at or very near the top right now.
From a guru perspective, GM has better owners, including a long list of top-tier money managers like Warren Buffett (Trades, Portfolio), David Einhorn (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio), Jim Simons (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), David Tepper (Trades, Portfolio), George Soros (Trades, Portfolio), Steven Cohen (Trades, Portfolio), and Paul Tudor Jones (Trades, Portfolio). Maybe they like the Corvette, too.
Conclusion
Even though GM is bigger with a slightly better product lineup, Ford is on par in brand loyalty and its stock is near a five-year low . While I would rather own a Corvette or Cadillac, Ford's stock is in a better position for investors to buy right now. I know this is going against all the big guru investors, but the crowd has been wrong before.
The risk is Ford won’t be able to catch up to GM and Tesla fast enough in the electric car business. Short term, investors will have to wait until 2019 to see the next wave of new models. In the meantime, a tidy 5% dividend and tight trading range should be enough to tide shareholders over. The reward is that the next generation of Ford autos continues to inspire loyalty to the brand with sales and profits following suit.
Disclosure: I am not long or short any stocks mentioned in this article.
