Having Trouble With GM? Consider Buying Ford Motor Company Stock

Many investors have been calling shares of General Motors (NYSE: GM  ) a buy over the past month, despite the worsening situation with its recall issues and criminal investigation by the U.S. Attorney General. However, the stock has finally started to break down, closing below $32 on Monday for the first time since June. So for those frustrated investors, I have a simple alternative: Buy Ford (NYSE: F  ) . 

Say what?
While both stocks are cheap, valuation-wise, General Motors simply has too many headwinds surrounding it. The automaker now expects the recalls to cost $1.3 billion. Coupled with separate first quarter costs totaling near $750 million and several potential multi-billion settlements in the future, this automaker certainly has its issues, (which can be read about in further detail, here.)

Ford on the other hand does not have these headwinds. 

So what does Ford have?
Ford boast some great prospects, and I'm not sure why investors aren't showing it more love. Everyone seems to be clamoring about General Motors' valuation, but Ford isn't expensive by any means. 

In fact, none of the automakers are that expensive -- with the exception of Tesla Motors. Ford trades at just 8.5 times next year's earnings, compared to the S&P 500's 12-month forward P/E ratio of 15.5 times. 

Earnings valuation alone isn't a reason to buy the stock, but Ford has other catalysts we'll discuss momentarily. Automakers -- like utility, material and old technology stocks -- often times trade at a discount to the broader market (and tend to do so for a very, very long time). 

Ford has held up remarkably well over the past several months, while some other stocks are getting violently sold off. Shares are up just north of 4% in the past month, and I think a lot of that has to do with the low valuation and positive outlook for the business. 

New vehicles
Ford is introducing a lot of new vehicles this year (23 to be exact), but none seems to be more of a potential game-changer than the new, aluminum-bodied F-150 pickup truck. 

The Fool's Brian Pacampara put out an interesting piece recently detailing some notes from a Deutsche Bank upgrade. In it he quotes the analyst: "According to Deutsche, Ford's risk to reward trade-off is rather attractive at this point. '[W]e now believe that Ford's new F150 will be significantly more cost competitive than we originally perceived (the aluminum body may only add $750-$800 cost, and there have been opportunities to save elsewhere in the vehicle),' said Lache." 

Many investors worried about the potential cost hike for each new truck, and whether that cost would hurt margins. But at only $750-$800 per truck, margins shouldn't feel much of a pinch, especially if the company can cut costs elsewhere in the vehicle. Hopefully, the number one selling vehicle in the U.S. will experience a nice sales boost due to improved fuel economy from the vehicle's lighter weight.  

International sales
Admittedly, Ford has significantly lower market share in China than General Motors or BMW, but it doesn't mean CEO Alan Mulally isn't focused on the region. 

The automaker has invested significant sums in recent years (some $5 billion) in order to benefit from the growing middle class and exploding auto sales. Recently, the company posted a 57% increase in first quarter sales in China. 

This is very encouraging, especially when coupled with the improving European situation. As pointed out by the Fool's Daniel Miller, Ford's European sales increased 11% in the first quarter. 

Mulally has consistently stated that his goal was to be at break-even operation in Europe by mid-decade. 

But given how well the plan has worked and the success of the company's new vehicles in the region, it has led CFO Bob Shanks to speak a bit more optimistically on the European situation: "This still leaves us firmly on track, maybe more firmly on track, to a profit, not breakeven, but a profit by 2015." 

The takeaway
Ford has impressive growth internationally, and U.S. sales continue to hum along, pressing the 16 million seasonally adjusted annual rate. 

Along with a great auto sales environment, Ford has an attractive dividend yield of 3.2% and trades at a discount to the broader market (with a trailing P/E ratio of 9.1 compared to the S&P 500's 18.6).

The automaker has many positives going for it, led by a veteran CEO. And unlike General Motors, Ford does not have multibillion-dollar headwinds ahead.

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  • Report this Comment On April 28, 2014, at 12:28 PM, TMFMarlowe wrote:

    "The automaker now expects the recalls to cost $1.3 billion"... which was taken care of in Q1. Done deal, paid. Still had a profit in North America. Look at why; it's important.

    Handwaving about "multibillion-dollar headwinds" aside (can you be specific?), GM still has a ton of upside. Look at GM's 2013 profits, look at VW's and TM's, look at the long-term initiatives GM has well underway to close the gap, ponder the possibilities -- as well as what might really hold them back. (It isn't product quality. Go drive a new CTS V-Sport. Wow is that a nice car. BMW has work to do.)

    Ford has maybe a 50% profit increase on the horizon, if they can hold margins around 9-10% in NA and stay on plan in Europe and China. That's great: Ford's certainly worth owning, as I've been saying here since January of 2009. But note that that "veteran CEO" is leaving shortly. The next year or so could be a very bumpy ride. There's a lot, a whole lot, that could go wrong with the F-150 launch. Mark Fields is extremely sharp and he has a superb supporting cast, but even boring orderly pre-planned CEO transitions can be tricky.

    Meanwhile, looking 3-5 years out, GM's global profits... could double. Higher risk, of course. Barra's ability to deliver is an open question. And has that culture really changed? But take a closer look. (And remember that F isn't really the comp, VW and TM are. This is a global business now.)

    John Rosevear (long both F and GM, for what it's worth)

  • Report this Comment On April 28, 2014, at 12:35 PM, SkepikI wrote:

    <Higher risk, of course. Barra's ability to deliver is an open question. And has that culture really changed?>

    EXACTLY!!! Betting on a culture change when the immediate evidence says otherwise (even if it turns out to be the "OLD GM's" fault. is in fact high risk JR

    Betting on a culture change being sustained (F) when the immediate evidence says it has taken is a lot less risky.

  • Report this Comment On April 28, 2014, at 12:49 PM, funfundvierzig wrote:

    Multi-$billion headwinds hitting GM might well include:

    * Fines, criminal and civil, imposed by the U. S. Department of Justice and states' Attorneys General.

    * The Ken Feinberg Fund to reimburse defrauded customers and victims of General Motors' not so cleverly cobbled and collaborative cover-up.

    * Judgements and jury verdicts and settlements ensuing from the litigation of hundreds of federal and state cases.

    * The recalls which seem to keep coming out of the woodwork. What else is the extremely evasive and hyper-secretive Management of GM hiding?

    * Severe reputation damage. The customer-hostile culture of GM's deceptive and dishonest Management may well repulse more than a handful of would-be buyers of cars and trucks. Market share erosion may take place.

    ...funfun..

  • Report this Comment On April 28, 2014, at 12:53 PM, AmericanFirst wrote:

    Note,

    Ford while financing their business, has out earned GM since the GM Bailout where GM received $125B in bailout funding, debt relief (defaulted bondholders), associated interest expense, corp. tax benefits and has been incredibly financially advantaged over F by our own government. One would be a financial midget to not agree. Yes, GM is doing well globally, but again, much has been at the expense and heavy cost to taxpayers, prior creditors, pension plans, retirees. There is a reason Ford has won the R.L Polk most loyal customer award four years in a row.

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