After an outstanding year in 2013, shares of Ford (NYSE: F ) slumped lower by nearly 8% once the company's 2014 outlook was presented. Clearly, the company recently reported some disappointing news, so does this mean that General Motors (NYSE: GM ) or even Toyota Motor (NYSE: TM ) are better buying opportunities?
What did Ford say?
According to Ford CFO Bob Shanks, the company's pre-tax profit in 2014 will be lower than in 2013. The company cites a number of reasons for this lack of improvement, including unanticipated government action in emerging markets, product recalls, and also a pension obligation boost.
With that said, pre-tax profits hit record highs in previous quarters. Therefore, a modest decline shouldn't weigh too heavily on the stock over the long term, especially since unit growth is still expected in 2014. Thus, the key question is: To what degree will pre-tax profits fall? It's a question that's sure to create quite a bit of speculation.
What does this mean for GM?
If we look at the factors that Ford is attributing to its gloomy guidance, we may see that some might also affect its peers.
Obviously, product recalls vary by company, but unanticipated government action or a rise in pension obligations could definitely affect the outlook for General Motors.
The U.S. auto industry is a space that tends to trade in tandem. However, in the last two years Ford has been an investment favorite, as the company paid down its debt, saw explosive growth, and gave back to shareholders in the form of a $0.10 quarterly dividend.
General Motors has performed well as of late, but with GM, there had been the negative stigma surrounding its largest investor, which of course is the government. Hence, while the government owned such a large stake, shares of GM remained cheaper than its peers, and the company still does not pay a dividend.
The Treasury has been selling shares at a rapid rate over the last year, and on Dec. 9 it confirmed that its remaining 31.1 million shares had been sold. Therefore, GM is no longer government owned, and has approximately $37 billion in liquidity that can be used for dividends and to make other investments.
Which has the most value?
A GM dividend will be a huge catalyst -- the value of the stock might end up making it a better investment opportunity than its peer, Ford.
Currently, GM trades at just 0.4 times its trailing-12-month sales; Ford trades at 0.4 times sales. Also, analysts expect GM to grow 6.5% in 2014, compared to 4.5% for Ford. Hence, GM is cheaper because it's expected to grow faster. This, combined with the likelihood of a near-term dividend announcement, might mean that GM presents more upside for auto investors..
What about foreign automakers?
Of course, auto manufacturers aren't limited to just the U.S., as other countries also have large companies in this space. The largest being Toyota, which might lead some to wonder if Toyota presents a better opportunity than U.S. manufacturers.
While this is a fair question, GM still looks like the best bet.
Toyota is trading at 0.6 times sales, which is more expensive than Ford or GM. Toyota is expected to grow 5% in 2014, slower than GM, and Toyota also trades at a higher price-to-future-earnings ratio than either GM or Ford. With that said, either U.S. manufacturer is likely a better opportunity than Toyota.
Will 2014 be a bright year for the auto industry?
Ford is planning to launch 23 models globally in 2014, which is by far the most product launches in a year in its history. Therefore, growth could accelerate and this fact serves as a huge catalyst into 2014.
Aside from a pending dividend announcement, GM's emerging market growth has been remarkable. Earlier this month, GM announced that it had sold 3 million units in China, a first for the company in that country. This emerging market growth simply adds to the reasons for being bullish about GM into 2014, and is one reason that sales of GM are expected to rise rapidly in the year ahead.
The auto market has been one of the true bright spots for the U.S. economy and is expected to see continued growth into 2014. While Ford is likely to recover the losses from Wednesday, and Toyota will maintain its place as the world's largest auto company, GM just looks to be the cheaper stock with the most catalysts going forward. Therefore, if GM isn't on your radar, then you might want to explore the stock thoroughly heading into 2014, as it could begin trading higher.
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