Why General Motors Company (GM) And Ford Motor Company (F) Look Good Based On Fundamentals?

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The two automakers of the United States, General Motors Company (NYSE:GM) and Ford Motor Company (NYSE:F) have done extremely well from the days of the financial crisis. It was not an easy task for both the companies when their rivals were in top gear to crush the domestic automakers. Despite the unfavorable conditions, the brands held it together, strongly braving the crisis. The focus on fresh models with an accent on fuel efficiency has not only brought them back but also looks solid now for further growth. There is no doubt that the prolonged lower interest rate helped both the companies revive their futures.

Pickup In Demand

The demand for trucks, as well as sport-utility vehicles, is picking up in the Americas. The lower gasoline prices came as a shot in the arm for both General Motors Company (NYSE:GM) and Ford Motor Company (NYSE:F) as they started focusing on margins in the domestic circuit. That normally was the case in respect of Germany luxury car makers. Now the wind seemed to have changed. It has not been long ago since the two automakers were focusing on volumes for sales crowns. That resulted in razor-thin margins and pumped out a big number of vehicles from their factories.

The scenarios have changed now. Both the companies are now flourishing simply because they focused on what the customers want to buy. Now, Toyota Motor Corp (ADR) (NYSE:TM) and Volkswagen AG (ADR) (OTCMKTS:VLKAY) are fighting for the volume part to claim the number one title. The shift in focus on profit over volume could not have come at a more appropriate time since the Chinese economy is slowing down at higher than expected levels. Both General Motors Company (NYSE:GM) and Ford Motor Company (NYSE:F) depend on China for profit growth, and the slower rate will naturally hurt them. If the volume remains the focus, then whatever profit is generated back at home might be washed off in China’s slower pace.

S&P Capital IQ expects light vehicles in the Americas to record 3.4% growth, to 17 million units in the current year. However, General Motors Company (NYSE:GM) will likely witness a 3% drop in revenue, hurt by the strong US dollar. On the other hand, the brokerage expects Ford revenue to grow around 2%. Profit margins are predicted to improve due to product mix and a drop in pre-launch expenses for GM.

Attractive Outlook

The near-term outlook is attractive mainly because of the domestic business for both the American automakers. Currently, interest rates remain favorable and most importantly the fuel costs continued to be weaker for a longer period. Analysts are bearish on fuel price in the near term as the OPEC is refusing to slash the production of oil. Traders have also shifted their focus from the commodity. It is for both General Motors Company (NYSE:GM) and Ford Motor Company (NYSE:F) to draw their tactics to make use of the weak gas prices fully to their advantage now. There is a strong demand for heavier vehicles that are driving the sales of high-profit vehicles.

Despite the two companies earning a solid profit, it is a fact that the pair continued to shed their market share in the United States. That might be due to their backing away from sedan sales that offered lower margins. Collectively, the two companies generated $9 billion in North America. Alternatively, they have earned over $3,000 per sold car. As a result, their operating margin was more than 10% in the region. Obviously, this has led Morgan Stanley (NYSE:MS)’s auto analyst, Adam Jonas, to wonder whether the two can get better than this. The analyst said that margins were in line or above the leaders of premium Auto Company in German. Now, Ford Motor Company (NYSE:F) CEO, Mark Fields, believes that the underlying demand will not collapse, even if the United States witnesses stalling of sales growth. He said that the replacement demand is driving the market now.

Valuation

S&P Capital has a price objective of $43 for General Motors Company (NYSE:GM) shares and $19 for Ford Motor Company (NYSE:F) shares. The analyst explained the valuation thesis. By applying a multiple of 8.5X to its next year EPS outlook of $5.04 and based on peer and historical comparisons, its one-price target for GM arrived. Apart from a 20% increase in dividends announced recently, the brokerage is expecting over $5 billion for share buyback in the next year period. However, challenges are there in the form of China.

Similarly, S&P’s price target on Ford was arrived at based on 10X its depressed next year EPS projection of $1.90, towards the higher part of the ten-year historical range. The brokerage said that it expects current year, as well as next year earnings to recover from last year’s depressed levels. Based on the current year’s EPS forecast, the shares of Ford Motor Company (NYSE:F) are trading at a premium PE compared to its domestic peer. The current dividend of 60 cents a share is likely to be hiked overtime. Therefore, Ford looked attractive for total return potential. Significantly, S&P Capital IQ rated both General Motors Company (NYSE:GM) and Ford Motor Company (NYSE:F) as a Strong Buy.

Conclusion

There are at least two or three significant factors that have the potential to drive the stocks. Fundamentally, both have reached a much stronger position than what they were. Also, both started to look at the pulse of the customers, thus leaving behind the focus on volume rather than profit. There is a threat of interest rate hikes. However, that will further weaken the oil price as traders will shift their money to the bond market from commodities. That means any impact from a rate hike will be offset by further weak oil or gasoline price. Therefore, General Motors Company (NYSE:GM) and Ford Motor Company (NYSE:F) appear to be well-placed for solid growth.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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