Tesla Could Lose the Love; Ford, GM Might Gain It -- Barrons.com
BY Dow Jones & Company, Inc.
— 1:48 AM ET 05/06/2017
The long-awaited auto slowdown appears to be here. Perversely, that could be good news for shares of Ford Motor (F) and General Motors (GM). Both car makers reported April U.S. sales results last week that were below expectations, and their shares each slipped 3%. Longer term, as these revamped companies demonstrate an ability to remain profitable even through an industry slump, they are apt to earn a higher valuation from investors.
The seemingly fuzzy math relates to Wall Street's assessment of highly cyclical companies. General Motors (GM) sold a record 10 million cars worldwide last year, and Ford (F) had its best results in 11 years, with 6.7 million cars sold. But selling lots of vehicles -- and posting peak earnings -- does little to excite the Street, which tends to value auto companies and other cyclical outfits on trough earnings.
Even as the impressive numbers rolled in, Ford's and GM's shares languished. Ford, at $11.14 a share, fetches only seven times this year's estimated earnings, while GM, at $33.77, trades for an even more measly 5.5 times projected profit. Both stocks are among the cheapest on a price/earnings basis in the Standard & Poor's 500 index. With U.S. car sales slipping -- April marked the fourth consecutive monthly decline -- both companies no longer have a tailwind.
Investors are trading Ford and GM shares based on what they imagine will happen when vehicle sales fade after a multiyear increase. In 2008, things got ugly for both auto makers; operating losses were a combined $8.7 billion that year, as the financial crisis raged. In June 2009, GM sought bankruptcy protection.
The companies have slashed costs since, and built sustainable businesses. GM earned about $6 a share, and Ford, $2 a share, in their latest peak years. In the next recession, those numbers could be halved, but investors' confidence in the durability of the auto business under all market conditions could increase.
Deere (DE), which has proved its strength in all seasons and recently reported an upturn in its business, shows what such confidence can do for a stock. After a long slump in its markets, it trades for 24 times this year's estimated earnings per share, which could mark a cyclical bottom for the company.
If GM and Ford could command a multiple of 15 times trough earnings, GM would be worth $45 a share, and Ford, $15. That implies a 35% gain for each stock from current levels.
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