Investing in the cyclical automotive industry has its ups and downs, literally. Over the last couple of years, the industry has substantially rebounded and with the average age of vehicles still at a record high of 11.4 years, pent-up demand will continue to fuel new-vehicle sales in the years ahead. Ford (NYSE: F ) and General Motors (NYSE: GM ) believe there is much growth to be had and are currently putting their money where their mouths are. Here's a look at how both are investing in their future and what it means for investors.
The strength of any automotive company essentially comes down to the vehicles it produces and the value consumers see in them. It's important for automakers to find the right balance between refresh rates, which typically take place on vehicles every three to four years, to optimize sales and profitability. The good news is that both Ford and General Motors are much better at matching supply to demand, and refreshing vehicles in a timely manner, than in years past. That should bode well as both companies look to expand their vehicle launches this year to boost future sales and revenue growth.
Last year, General Motors launched 18 vehicles in the U.S. and will keep its pace similar this year as it introduces 15 new or upgraded models. In China, General Motors and its joint ventures will roll out 17 new or upgraded models this year and will open four additional plants by the end of next year. General Motors continues to sell well in China and topped 3 million deliveries last year; with the opening of the additional plants there, it will enable GM to produce up to 5 million units annually.
Ford is taking an even more aggressive approach this year, when launches are compared as a percentage of overall vehicle counts, and will unleash 16 new vehicles in the U.S. market. Across the globe, Ford's all-new or significantly refreshed count surges to 23 vehicles, which is more than double the amount the automaker launched in 2013. In other words, Ford is launching roughly 45% more vehicles this year in the U.S. alone than it did across the globe in 2013.
Currently, GM drives its business through the U.S. and China and significantly leads crosstown rival Ford in the latter region. General Motors has more than 14% of market share in China while Ford aims to claim 6% in 2015. That said, Ford is catching up and growing its market share; it currently has six major facilities under construction in the region and two will begin production in China this year while two more will begin in 2015.
What it means for investors
All these vehicle launches, refreshes, and capital expenditures come at a cost and will directly affect GM and Ford as investments this year. As you can grasp from the numbers previously stated, GM will be executing fewer launches and investors should expect modest improvement on its operating performance and earnings before interest and tax.
Expect GM's North American margins to be similar to last year, which improved over the last four quarters sequentially from 5% to 6.2%, 8.4%, and 9.3% in the most recent quarter. General Motors' goal is to sustain margins above 10% in North America, but investors shouldn't expect that to happen just yet – look for margins to dip back below 9% this year.
Meanwhile, Ford is ramping up its capital expenditures to continue gaining market share in the U.S. and China and it will come at a cost significant enough to lower margins and earnings this year – something that sent some investors to the door recently. As you can see below, its spending and fresh vehicle lineup has enabled Ford to gain more market share in the U.S. than any other major automaker.
Ford now expects this year's pre-tax earnings to come in between $7 billion and $8 billion, compared to 2013, which is expected to hit $8.5 billion. I believe long-term investors should take Ford's speed bump in stride as its investments in many vehicle launches will fuel market share and revenue growth over the back half of this decade. Moreover, while margins will take a slight whack, Ford has already proven it can sustain North American margins above 10%, and will be able to accomplish that again as soon as 2015.
Ultimately, I believe the automotive rebound still has legs, especially as the average age of vehicles nears 13 years -- a point in time where owners scrap vehicles at a drastically higher rate, providing more vehicle demand. Ford and General Motors seem to agree and are putting their money where their mouth is this year to capture growth in the years ahead, and that's a good sign for long-term investors.
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