Despite the Recall Scandal, Both Ford and GM Are Attractive

Auto sales continue to recover, and both Ford and General Motors are attractively priced.

Apr 1, 2014 at 7:00PM
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U.S. stocks got a good start to the second quarter, with the benchmark S&P 500 notching up an 0.7% gain on Tuesday -- enough to achieve a new record high. The narrower Dow Jones Industrial Average (DJINDICES:^DJI) rose 0.5%, but the best evidence that traders' risk appetite has returned was the surge in the technology-heavy Nasdaq Composite Index, which was up 1.6%. Technology shares came under significant pressure last week, with the Nasdaq index losing nearly 3%. It's difficult to say what has motivated this reversal in sentiment -- and not particularly useful, assuming you're a fundamental, long-term investor -- but the phenomenon is undeniable. One name for which there are legitimate, identifiable reasons for today's gains: Ford Motor (NYSE:F). Meanwhile, rival General Motors (NYSE:GM) was in the spotlight today for all the wrong reasons as CEO Mary Barra testified before Congress regarding the company's faulty ignition switch recall.

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People are buying cars -- they certainly were last month, in any case. U.S. auto sales data released today showed sales of lightweight vehicles (i.e., autos and light trucks) rose to an annualized rate of 16.4 million in March, making it the best March since 2007 -- just before the start of the credit crisis, in other words. The figure also compares favorably to the industry's expectations, based on the 15.8 million estimated generated by a Thomson Reuters poll of 40 analysts. Ford Motor itself was forecasting sales of just 15.7 million units.

And speaking of Ford, its March vehicle sales rose 3.3% year-on-year to 244,167, where analysts were expecting only a 1.1% gain. (If you're thinking Ford's sales don't square with the 16.4 million vehicles sold across the industry, remember that the latter number is annualized.)

Better yet, sales of Ford's revenue and profit engine, the F-Series, grew 5.1%, topping the 70,000 unit mark for only the fourth month in the past seven years. Note, however, that this may reflect demand that's being pulled forward because of a specific factor: According to MotorTrend, "[I]t's likely that dealers are stocking more 2014 F-Series inventory to prepare for the launch of the new all-aluminum 2015 Ford F-150 which will require the truck's factory to shut down for retooling later this year." Either way, investors were delighted, sending Ford's stock up 4.6%.

General Motors' sales actually rose faster than Ford's last month, by 4.1% to 256,047; however, that was drowned out by the coverage of new CEO Mary Barra's appearance before Congress to discuss the handling of the company's recall of cars with faulty ignition switches. According to GM, the fault has been linked to 13 deaths in accidents during which airbags failed to deploy.

Barra has been praised in her handling of the crisis so far, but there was no getting away from some uncomfortable moments before the House Energy and Commerce investigations subcommittee that did not paint the company in a good light. Furthermore, according to The Wall Street Journal, "Ms. Barra repeatedly told members of the subcommittee that she didn't know details behind the delayed recall." Little wonder, then, that General Motors' stock recorded an 0.2% loss today.

There you have it: Shares of Ford and General Motors diverged today, serving to widen an already significant valuation gap between the two, with the former trading at 12.2 times the next 12 months' earnings-per-share estimate against 9.1 for the latter. Nevertheless, I'm not forced to choose between the two -- at those valuations, I think both look attractive for long-term investors (or "investors," for short).

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Alex Dumortier, CFA, has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors and owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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