It's tough to be bullish on the automotive industry sometimes. The bankruptcy of General Motors (NYSE: GM) in 2009 was a memorable example of the harsh reality of a struggling company hit with a difficult macroeconomic environment. Then there was Ford (NYSE: F), which experienced brutal operating losses for years. While America's recovery in the automotive industry has a long way to go, data suggest that it's coming back.
Things are looking up
Despite all the doom and gloom that is implied through weak consumer confidence numbers, Ford's sales numbers speak for themselves. After great efforts to reinvent itself after the financial crisis of 2008, the company boasts not only profitability, but robust cash flow and growth in market share. Ford is reducing debt with every consecutive quarter on top of that. Because of Ford's efforts, it was recently awarded new BB+ credit ratings by Standard & Poor's and Fitch -- just one notch short of investment-grade status. While this is far from perfect, it proves that the carmaker is at least moving in the right direction in terms of its obligations.
Ford's latest quarterly report also indicates continuing improvement in the automotive market despite all the negative data we've been seeing relating to consumer confidence and sky-high unemployment. Revenue has been surprisingly strong in the third quarter of 2011, growing at a comfortable 14% relative to Q3 2010. Sales volume supports the revenue data -- the growth was about 7% in the last year.
Reward never comes without risk
Like anything, an investment in Ford comes with risks. While earnings growth is apparent, Ford is actually struggling to stay profitable in Asia. Ford lost $43 million last quarter before taxes. An even bigger problem is Europe, which lost Ford a whopping $306 million (which was 56% more than last year's losses). Since the eurozone is considering massive austerity measures in response to the debt situation, it's possible that Ford will be seeing bigger losses across the pond in coming quarters. Nonetheless, for now, strong demand in the United States is the main driver in propping up the company's prospects. Since most of its profitability is coming from this one market, Ford's fate is strongly tied to the fate of the USA.
GM: a similar story with one big difference
Unlike Ford, General Motors has a particularly strong position in China and will see solid revenues from the country for years to come. Just days ago GM reported that it had broken a new Chinese sales record in October 2011 of 220,412 units, a huge 10.4% annual increase. GM also has a very clean balance sheet, which makes it very possible that we'll see a share buyback or dividend relatively soon.
Then again, dividends aren't everything
While investors have been clamoring for a dividend from Ford, it's important to remember that the company has only recently swung to profitability after years of losses. Debt obligations remain a problem, too. By taking the road of caution, CEO Alan Mulally is demonstrating a real sense of long-term responsibility to the company and its shareholders. He's basically willing to lose some popularity points today for a better tomorrow. Having said that, Mulally hints that a dividend is possible in the near future.
It's still a scary world
Despite great leaps in progress, GM and Ford are toughing it out in one of the most competitive markets in the world with huge obstacles still impeding progress. Manufacturing costs and raw materials continue to become increasingly expensive. This eats away at profit margins. Research and development for environmentally friendly cars is also becoming more expensive because of market competition and tougher government regulations. Perhaps worst of all, unemployment is still abnormally high, which is keeping demand for big-ticket purchases, such as a new car, rather weak.
On the bright side, it seems that the uncertain macroeconomic situation has been fully priced into the shares. For instance, at the time I'm writing this, Ford trades at a rock-bottom P/E multiple of 6.6, while GM trades at an even cheaper P/E multiple of 4.7. Sure, America's economy may have a "frustratingly slow" recovery, as Federal Reserve Chairman Ben Bernanke himself said, but when optimism returns, these shares will shoot up rather quickly. You may not want to pass up on these terrific companies or their shares now; they might make you a killing in the long run.
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