Forget The Walking Dead. The best zombie show this Halloween came courtesy of Ford Motor Co. and General Motors Co. Investors have been treating the two like rotting corpses, but they’ve risen from the grave and aren’t going back.
Tuesday, Ford easily exceeded third-quarter expectations, posting 40 cents (U.S.) per share in profit from continuing operations, compared with expectations of 30 cents. The 12-per-cent pretax margin at its North American operations was the best in years. Wednesday, GM reported 93 cents per share in earnings versus a 60-cent consensus, with the company’s North American operations providing much of the upside.
Both companies’ shares rose strongly Wednesday, the first day back for the U.S. markets after Superstorm Sandy. And yet, they remain cheap, which means investors still have time to abandon their skepticism.
Much of the weight on the two companies’ shares this year has been the mess in Europe, where each have substantial operations. And, indeed, Ford is expected to lose about $1.5-billion there this year, while GM just increased its forecast loss to the $1.5-billion to $1.8-billion range.
What is happening, however, is that both companies’ better-than-expected performance elsewhere on the globe is trumping – or at least should be trumping – the European problems.
Analyst Peter Nesvold of Jefferies & Co., who has a “buy” rating and $14 price target on Ford, says the third quarter was the most profitable for the company in North America since the company started reporting results by geography in 2000.
“Understandably, the market has obsessed for most of this year over Ford’s widening operating losses in Europe,” Mr. Nesvold says, noting “Europe’s automotive industry has a dreadful market structure” and its “time of reckoning surely seems to be near.”
“Which brings us back to our original point,” he continues. “Ford was in this position – actually, one far worse – as recently as 2006, and mapped out a strategy to engage in the deepest ‘self-help’ restructurings the industry has ever seen. … Look at what this company has done in North America. We think this team is going to get it right.”
The common perception is that Ford, which eschewed government bailouts in the financial crisis, has a balance sheet burdened by legacy liabilities. A quick glance at some investing websites, which list the company with $100-billion or so of debt, buttress the view.
But much of that debt is held by the company’s finance subsidiary, which is more bank than industrial giant, as it uses its borrowed money to make loans, creating an offsetting asset. Equity analysts tend to look at the credit quality of the auto-making operation separately, and there, long-term debt is about $14-billion, versus $24-billion in cash.
(Both companies have large pension obligations, certainly; but the current environment of record-low interest rates and erratic investment returns has helped balloon pension deficits. If you believe in a medium-term reversal of these conditions, the pension picture for both Ford and GM improves markedly.)
GM has a little less to crow about than Ford, as its North American earnings and market share slipped year-over-year. It beat top-line expectations in all its other geographic segments, however, and maintained its global market share.
Its balance sheet is even more robust than Ford’s: $5.6-billion in debt and $31.6-billion in cash at Sept. 30.
So what will these shares cost you? Even with Wednesday’s gains – Ford topped $11 and GM zoomed past $25 – both trade at about seven times their 2013 estimates. GM’s healthy cash position means its multiple of enterprise value – market capitalization plus net debt – is about 2.6, a ridiculously low figure. Ford is more expensive by that measure, but it’s actually distributing its cash via a dividend that yields 1.9 per cent.
In Mr. Nesvold’s “buy” case for Ford, he asks, “why don’t you own this stock?” He is cooler on GM’s shares, as the company has zipped past his $23 price target. But the question, I think, is well worth asking for both of these auto makers, risen from the dead.