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Saturday, August 3, 2013

GM, and Ford – Onward and Upward?



As of this writing, the stock price of General Motors closed at almost $37.00, while Ford closed at about $17.  Both announced strong second quarter profit results.  Have GM and Ford peaked?

I’m not in the business of giving buy/sell stock recommendations but a discussion of both the head winds and tail winds the Detroit 2 automakers face going forward might be interesting.  

In the case of GM, the current stock price represents a degree of redemption.  GM’s Initial Public Offering stock was priced at $33.00 in November 2010, after it emerged from Chapter 11 bankruptcy. Immediately after the IPO the stock price took a quick jump to near $40.00, then dove to a low point of around $18.00 as recently as 18 months ago.  Some RW pundits, including Forbes, were predicting GM would be back on bended knee to the U.S. Government looking for funds to survive.   Since the IPO, GM has hemorrhaging cash in Europe as was the old GM.  

But after a decent first quarter in2013, GM just announced a $1.2 billion profit for the second quarter.  The company holds over $44 billion dollars in cash and credit and is rolling out new and well accepted models every few weeks, it seems.  The company enjoys a favorable UAW contract for the next few years, and is selling into a U.S. auto market with considerable pent up demand.  Chevrolet is setting sales records, and a resurgent Cadillac has restored brand prestige.  In fact, production restraints from cutbacks made during the bankruptcy period restrain current production and profits. 
It is expected that the U.S. Government will complete its sell off of GM stock in 2014.  In the middle of all of this, GM and its stockholders enjoy a gift provided by the Federal Government.  The new GM was granted “loss carry forwards” from the old GM that could amount to $45 billion in tax savings in the coming years.  That’s a lot of money that can be deployed in new technology and model development.  

On the flip side, GM’s market share remains a challenge.  Toyota has regained the mantle of world’s largest auto manufacturer.  There are no big captive finance arm profits contributing to overall results as there used to be with the old GM and its captive GMAC before GMAC got involved in mortgage lending.  For perspective, GM Financial, GM’s new “owned captive,” contributed $264 billion to GM’s bottom line. Ford Motor Credit contributed $454 million to Ford’s bottom line on about 20% fewer vehicle sales.  Ally Bank, GM’s “non owned captive,” and the old GMAC, is using its own profits to pay back to U.S. taxpayers for keeping it alive during the 2008 – 2010 crisis. 
Europe remains a challenge for GM.  Vice Chairman Steve Girsky has been been dispatched there to deal with the morass of labor and bureaucratic issues in a market that doesn’t look like it will rebound any time soon.  But the losses in Europe have recently been trimmed.

There continues to be executive shuffling at GM.  There are a couple of major exec announcements a month with high level executives either being “broomed” or leaving for “personal reasons.” The Board of Directors has developed no plan for CEO Dan Ackerson’s successor and seems to be particularly dysfunctional.  Ackerson himself seems to be a challenge for GM employee morale.  Even the rapid growth in China has been tempered recently.  GM’s recent buy into Peugeot is interesting.  Noted auto industry analyst Maryann Keller referred to that recent investment as “GM buying in to a “black hole.” 
 
Ford’s stock had reached low ebb in November 2008, closing as low as $1.26.  The stock price peaked at $19.00 in January 2011, driven by Cash for Clunkers euphoria and auto industry exuberance caused by the record GM IPO. The current stock price represents a significant recovery from $9.20 in November 2011.  The company just announced a second quarter pre-tax profit of $2.6 billion, which is more than GM on fewer sales.  The company states their liquidity as $37.1 billion.  Ford recently doubled its dividend to 10 cents per share, its highest in seven years.  according to Reuters. 
Ford also benefits from the same beneficial UAW contract it gained from UAW as a consequence of the overall U.S. auto industry reorganization. Ford Motor Credit contributes greatly to the parent company’s bottom line.

Ford, like GM, is challenged in Europe and is facing market share erosion at home.    Ford has to compete with two U.S. competitors, Chrysler and GM, which shed debt through their bankruptcies, while having to pay all of its own obligations.  The company continues to struggle with the Lincoln brand, having shed its Mercury division.  

On balance, things look good overall going forward for both automakers, despite the obvious challenges.  Europe won’t be in the economic doldrums forever.  Despite declining market share in the U.S., the home market seems to be advancing toward the old standard of a 17 million SAAR. (Seasonally Averaged Annual Rate)  As costs stay in line and sales continue to advance with the expanding SAAR, without huge incentives required to achieve them, profitability should stay strong for the both automakers for the foreseeable future.  Some analysts see Ford as a $40.00 stock with GM at $60.00.  Time will tell.