Although some of north America’s large automakers were sputtering only a few years ago, Ford Motor Co. and General Motors Co. (GM), both based in Detroit, are now on cruise control. The measured pace of automobile sales growth today is giving the two automakers time to cement the efficiency gains made during their previously difficult times.
The two companies are now profitable – even with U.S. auto industry sales of 14 to 14.5 million units vs the pre-recessionary norm of more than 17 million units – but they aren’t facing capacity constraints, which translates into good quality control as well as sustainable pricing, says Massimo Bonansinga, portfolio manager at Signature Global Advisors, a division of CI Financial Corp. in Toronto. That should be helpful as both Ford and GM face the challenge of the return of strong competition from Japan-based companies that have now recovered from the impact of the 2011 tsunami.
North American automakers were forced to focus on efficiency during the recession, and the resulting closures of inefficient plants, as well as negotiations with unions, have revealed how much more profitable these firms can be.
Ford was the leader in this strategy and managed to avoid the bankruptcy that forced GM to take a $50-billion bailout from the U.S. federal government in exchange for 100 million, or 26.5%, of the company’s common shares. (All figures are in U.S. dollars.)
Automakers are very complex companies that need “very good leadership,” Bonansinga points out, which he believes Ford’s CEO, Alan Mulally, provides. (Mulally had turned Seattle-based Boeing Co.’s commercial airline business around in the mid-2000s.)
David Segal, a portfolio manager in Short Hills, N.J., with Franklin Mutual Advisers LLC, a subsidiary of San Mateo, Calif.-based Franklin Resources Inc., doesn’t have the same enthusiasm for GM’s management. However, he says, “For the most part, it has done a good job.”
Both automakers have large legacy costs but are reducing them gradually. The strategies to do so include offering retirees and salaried employees a lump-sum payment each in lieu of continued pension payments and benefit rights, as well as getting the unions to agree to company contributions to 401(k) plans (the U.S. equivalent of RRSPs) for new employees.
Here’s a look at the two automaker companies in more detail:
– ford motor co. is much more prepared to deal with an economic downturn now than it was before the global financial crisis hit, says Christian Mayes, industrial analyst with Edward Jones & Co. in St. Louis. “It is selling fewer cars but making more money.”
Among Ford’s initiatives is producing more models on each assembly platform, says Mayes, which lowers costs and makes it easier to get replacement parts.
Bonansinga likes Ford’s strategy in Europe – where auto sales remain very low – of closing inefficient manufacturing plants and consolidating production in the most efficient ones in places such as Germany and Turkey. Ford should be “in great shape” in Europe by 2014, he says.
The quarterly dividend was reinstated in December 2011 at 5¢ a share after being suspended for more than five years, which Bonansinga considers “a very strong signal of confidence” on the part of Ford’s management and board.
Bonansinga sees upside to the share price, and analyst reports from J.P. Morgan Securities LLC and UBS Securities LLC (both are based in New York) have a “buy” or “overweight” rating on the stock, with 12-month target prices of $13 and $15 a share, respectively. The 3.8 billion outstanding shares closed at $11.45 on Nov. 30.
Net income was $4.1 billion for the nine months ended Sept. 30 on revenue of $97.8 billion, vs net income of $6.6 billion on revenue of $101.7 billion in the corresponding period a year prior. The drop in earnings was mainly due to the weakness in Europe.
– general motors co. Segal, as a deep-value investor who’s attracted by turnaround possibilities, has been invested in GM for about a year and a half. The company, he says, has performed “within our expectations.” Segal likes GM’s moves to “de-risk” itself, both in Europe and in terms of legacy pension costs.
GM has plans to achieve break-even operating results in Europe by mid-2015, Segal notes, and to benefit in North America from many new launches in 2014 and 2015.
GM’s other advantage is China, where the firm sells almost as many cars as it does in North America. China now is the world’s biggest automobile market, and, Mayes says, Ford is just now building out in China; he thinks it will take “a lot of time before [Ford] has a meaningful presence” in that market.
Segal would like to see GM buy back most, if not all, of the shares owned by U.S. and Canadian governments, as he feels that this ownership is a distraction to GM’s management and to investors.
As with Ford, Europe is a drag on GM’s net income, which was $5.1 billion for the nine months ended Sept. 30 on revenue of $112.9 billion, vs $8.5 billion on revenue of $112.3 billion a year earlier.
The 1.7 million outstanding shares closed at $25.88 a share on Nov. 30. A J.P. Morgan report has an “overweight” rating on the stock, with a 12-month target of $30.
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