GM Vs Ford – Why Did Warren Buffett Buy 10 Million Shares of $GM?

General Motors and Ford Motor shares tend to trade in tandem, even though we all know GM is the basket case that needed a federal bailout, while Ford sailed through the economic crisis without any taxpayer assistance.

Lately, though, investors seem to be showing more faith in GM. So far this year, GM shares are up 20 percent, while Ford’s are down 8 percent. The market capitalization for both companies is around $38 billion.

No doubt GM’s stock has been bolstered by the public endorsement of two well-known value investors, Warren Buffett and David Einhorn.

Buffett’s Berkshire Hathaway disclosed in May it had purchased 10 million shares of GM. Then, last week, Einhorn cited GM’s upside potential in an address to the Value Investing Congress in New York. His Greenlight Capital owns 17.4 million shares, or about 1.1 percent of GM. (The U.S. Treasury, by comparison, owns 500 million shares, or about 26 percent.)

Both stocks are undervalued, with price-to-earnings ratios of around 8, vs. 12 for the overall industry. But aside from the Buffet Bump, GM stock has pulled ahead of Ford for other reasons. Investors have pretty much “baked in” all the bad news they know about GM. Its European business is a disaster; its engineering costs are still too high, and it’s got a pension cloud hanging over its head. There aren’t a lot of surprises there.

In the case of Ford, however, investors enamored by its up-by-the-bootstraps survival in 2009 and 2010 are beginning to notice some of the warts.

It, too, has an ugly mess in Europe, but the company’s warning in July of a $1 billion loss there took many investors by surprise. It lost money in Asia and Africa in the second quarter. And Ford is spending like a drunken sailor in China to try to catch up with rivals including GM, Volkswagen and Hyundai, which have a big market share lead there.

Ford plans to introduce 15 new models in China by 2015, and is building five new manufacturing facilities and bringing its Lincoln luxury brand there in 2014. Ford needs to become a major player in China, for sure, but the billions it is spending now will limit near-term corporate profits. In July, the company said its 2012 pre-tax profit will be lower than the $6.2 billion it earned in 2011. Third-quarter results will be announced in late October.

Strong profits in North America are carrying the company right now, but even here there are some worries. In the U.S., Ford has been losing market share, down 1.3 percentage points so far this year, to 15.5 percent, according to market researchers AutoData. Market share numbers can be distorted, however, by seasonal sales to corporate and government fleets. Most carmakers point to retail sales at dealerships as the best measure of market trends. If you strip out Ford’s sizable (and profitable) fleet sales, its retail market share is 12.8 percent year-to-date, down almost a full point since the same time last year. Like other carmakers, Ford is giving back some of the market share gained in 2011 when Japanese carmakers were hobbled by the earthquake and tsunami. GM’s retail share is down 2 points year to date, for instance.

But the point is this: For all the competitive advantages Ford has had since 2009 — its two domestic rivals in bankruptcy, the biggest Japanese carmakers crippled by quality recalls and natural disasters, and a new model lineup that was one of the freshest in the industry — Ford really hasn’t been able to make any lasting gains in the market. Since the 2009 crisis, its retail share is down 0.8 percent. Meanwhile, rivals like Hyundai, VW, Chrysler and GM have all gained.

Now it’s about to face a new assault on its most profitable vehicle: the F-150 pickup. Chrysler is just now launching a refreshed version of its Ram pickup, with an EPA fuel economy rating of 25 miles per gallon on the highway, better than any other pickup. And next year, GM will introduce its next-generation Chevrolet Silverado and GMC Sierra pickups. Ford isn’t scheduled to redesign the F-150 until 2014.

Then there’s the uncertainty about when Ford’s highly regarded chief executive Alan Mulally will retire, and whether his successor will be able to follow such a tough act. That, too, could be weighing down Ford’s stock. Published reports suggest Mark Fields, Ford’s president of the Americas, will soon become chief operating officer, making him the likely successor to Mulally.

Morgan Stanley Smith Barney analyst Adam Jonas isn’t worried about any of this. In a lengthy note to investors on Tuesday, he spelled out all the reasons why he’s bullish on Ford and thinks the stock could hit $17, up from just above $10 today. He thinks Ford will ultimately benefit in Europe when other competitors are forced to close plants. He says it’s good that Ford is not overly exposed to China’s slowing market for the next couple of years. Because most of its profit comes from sales of its pickup trucks, he says Ford shares will take off when the housing market fully recovers. “Ford is a housing stock in auto company clothing,” he writes. The F-150 will hold its own just fine against redesigned competitors, he writes. Besides, its own 2014 renewal isn’t that far off. And the drama over Mulally’s successor? Forget about it. Mulally changed the company for good, and whoever is the next chief executive will pick up where he left off.

It all sounds optimistic. But so far, investors aren’t sharing his enthusiasm.

Source: Why Ford Is Lagging GM On Wall Street

Current Most Popular:


Share Warren Buffett's Wisdom:

Warren Buffett News is updated with stock market and economic commentary. If you would like to receive the articles and videos directly in your email inbox, Warren Buffett News offers that service at absolutely no charge.

or Follow on Twitter

Warren Buffett News: Videos, Articles, and Summaries

Warren Buffett News features articles and videos from Warren Buffett. A summary of each video is also provided. This page is updated with Warren Buffett's investment advice and commentary on stock recommendations, the global financial markets, and the economy.