What's Wrong With Ford and GM Shares?
Since Jan. 1, Ford shares have been flat and GM shares have fallen about 4 percent, while the S&P 500 is up 9 percent and the Dow Jones Industrial Average is up 10 percent. Ironically, the stocks are lagging even though recovering auto sales have been a pocket of strength in the economy and were a key element in President Obama's 2012 campaign for re-election. Nevertheless, the two companies' broad global footprints are hurting them today.
"The biggest factor weighing on these companies is Europe," said S&P Capital Markets analyst Efraim Levy, in an interview. "As you get more clarity on a turnaround in Europe, on if that will happen and when, it will relieve pressure on the stocks. In the U.S., both companies are doing well and are gaining market share."
Ford and GM both hit 52-week highs on Jan. 15, when Ford touched $14.30 (reached again on Jan. 17) while GM touched $30.68. The high marks reflected the enthusiasm surrounding the Detroit Auto Show, where both Ford and GM highlighted promising new products. Subsequently, fourth-quarter earnings reports disappointed investors, even though Ford beat estimates, because of lower-than-anticipated margin outlooks in both cases.
On Tuesday, Ford closed at $13.39 and GM closed at $28.37.
Looking ahead, the impending impact of 23 new product introductions by 2017 seem likely to boost GM's market share, which declined to 18 percent in 2012 from 19.6 percent in 2011. "GM had been suffering from a dearth of new products because it was headed to bankruptcy, but now it's bringing new products to market again," Levy said.
(Read More: Ford Earnings Is Tale of Two Companies)
Nevertheless, Levy downgraded GM shares to hold from buy following the Feb. 14 earnings report, reducing his 12-month target price to $31, reflecting weakness in Europe and an increase in the expected tax rate to 35 percent from 10 percent, partially offset by a $600 million reduction in depreciation charges following an asset write-down in Europe. Jefferies analyst Peter Nesvold has a hold and a $29 price target.
Levy dismissed the suggestion that GM's share price has been impacted by the U.S. Treasury's sale of $490 million worth of GM shares in February, when shares traded between $26.19 and $29.36, equating to a sale of about 17.5 million shares. Average daily volume is around 11 million shares.
"If there is a value in the stock, the stock should move towards its natural value regardless of the potential overhang from selling shareholders," Levy said, adding "$500 million worth of stock is not so much for GM."
Regarding Ford, "sentiment clearly cooled going into and after the 4Q earnings report and (Ford) entered oversold territory, a recent bounce notwithstanding," Nesvold wrote in a recent report which suggest the lagging share price reflects false perceptions following the earnings report. Nesvold had a buy rating on the stock and a price target of $16.
"We continue to believe that Ford has the right team in place to address the operating losses in Europe; that the company's U.S. product cycle likely hits the accelerator again in 2014 with the new F-150; and that South America and Asia Pacific Africa (APA) can be substantial earnings contributors over time," Nesvold wrote. He forecast a return to break-even in Europe by 2015; the company expects losses of $2 billion annually in Europe this year.
(Read More: GM US Auto Sales Beat Estimates, While Ford Lags)
Nesvold said three aspects of Ford's outlook suffer from false negative perceptions. "The biggest overhang on Ford shares has been the step-down in North American margins implied in the 2013 outlook," to around 10 percent in 2013 from 10.4 percent in 2012, Nesvold said. Investors anticipate increases in pension and amortization costs, but apparently fail to consider that "Ford's North American business should throw off more cash in 2013 than it did in 2012," he said.
Secondly, despite the falling yen, Ford has seen no evidence of higher incentives by Japanese automakers. Additionally, Nesvold said, a projected $1.5 billion increase in capital expenditures is "a high-class problem (because) Ford has multiple projects into which it can deploy capital at high incremental returns."
UBS analyst Colin Langan has buys on Ford, GM, Toyota and Hyundai. In a recent report, Langan said GM is the best-positioned automaker because of new vehicles arriving this year including the K2XX pickup. GM has a 33 percent refresh rate, he said, while Toyota is second with a 27 percent rate. Ford lags with a 7 percent refresh rate, but nevertheless should benefit from its 2012 launches of the Fusion and Escape, he wrote. Top five 2013 launches will include the K2XX pickups and SUVs as well as Toyota Corolla, Nissan Rogue and Jeep Cherokee, Langan said.
—By TheStreet.com's Ted Reed
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