Following government intervention and industry-wide losses, auto companies are naturally trading at low multiples. The Street currently favors General Motors (GM) (see here) over Ford (F), but I am more optimistic about the latter due to its better operational resiliency and improving liquidity.
From a multiples perspective, GM is the cheaper of the two. It trades at a respective 5.9x and 6.7x past and forward earnings while Ford trades at a respective 7.7x and 7.5x past and forward earnings. In addition, Ford also is safer due to less issues of moral hazard and its dividend yield of 1.6%.
At the a January 2012 sales statement call, Ford's management noted overall progress:
We estimate that total U.S. sales, including medium and heavy trucks, finished the month at approximately 890,000 to 895,000 vehicles. This would equate to an approximate 7% increase for the industry over year-ago levels and a SAAR that we estimate is going to run in the mid- to high 13 million vehicle range. We are very -- overall, we're very pleased with January's industry performance as it really carries through with what we saw in the fourth quarter of last year.
January sales at Ford were up 7% compared to January a year ago. This resulted in a total sales number for the month of 136,710 vehicles. Last month, we saw a shift in the industry to smaller passenger cars and smaller utilities. Small cars, its sales increased as a percent of total sales from just under 19% in December to almost 23% of the market in January.
As much as this call was reassuring, fourth quarter results were still soft with an EPS of $0.20. Pricing aggression helped to offset input inflation, but investors are still concerned about margin erosion stemming from competitive pressures. A lower discount rate is further magnifying pension pressures. Deutsche Bank models free cash flow yield declining by around 460 bps to 14.4% in 2013 as ROE similarly falls. At the same time, net debt is diminishing and will turn into a net cash position of around $1.8B over the same time period. International business, particularly in South America, may be holding back growth. But the company's business mix and brand is solid. With a beta of 2.4, Ford has the opportunity to generate high risk-adjusted returns during a recovery.
Consensus estimates for Ford's EPS forecast that it will decline by 3.3% to $1.46 in 2012 and then grow by 16.4% and 13.5% in the following two years. Assuming a multiple of 10x and a conservative 2013 EPS of $1.65, the rough intrinsic value of the stock is $16.50, implying 29% upside.
As for GM: The company is undergoing restructuring in Europe as pricing pressures loom, eating away cash flow. Self registrations are trending upwards in Europe. Fuel efficiency and safety regulations are yielding greater cost headwinds. For the month of January, sales fell by 6.1%, considerably worse than consensus. With that said, the company has a top balance sheet, effective tax shield, and pension concerns are starting to dissipate as the mass market picks up in Asia.
Consensus estimates for GM's EPS forecast that it will grow by 25.7% to $3.91 in 2011, decline by 4.6% in 2012, and then grow by 25.2% in 2013. Assuming a multiple of 7x and a conservative 2013 EPS of $3.68, the rough intrinsic value of the stock is $25.76, implying 1.6% downside.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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