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Here’s why GM Is Trading At A Discount To Ford This Year
By: Martin Blanc
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General Motors Company (GM), the largest US automaker by sales, has underperformed rival Ford Motor Company (F) on the New York Stock Exchange so far this year. While Ford is up 3% year-to-date, GM is down more than 16% over the same period. GM’s recall problems and resulting costs have left investors valuing Ford as a better company among the two for now.

GM’s Endless Vehicle Recalls

In 2014, GM has already recalled 12.8 million vehicles globally and 11.2 million in the US alone surpassing its previous record of 10.7 million vehicle recalls in the US in 2004.

GM’s first major set of recalls came in February this year, when the company recalled 2.6 million vehicles with faulty ignition switches, which led to 31 crashes and 13 resulting fatalities. The recall, which came after a shocking decade-long delay, caused GM to announce $1.3 billion in charges in the first quarter alone.

Following an extensive investigation led by the US Department of Justice, the National Highway Traffic Safety Administration (NHTSA), and Congress, GM was found guilty of being aware of the problem as early as 2005, and has agreed to pay $35 million in fines to settle the federal probe.

Since the controversial February recalls, the company has been on a recall spree as regulators seek to locate patterns of consistency in complaint filings from GM customers, and point out internal culture problems that could have led to such practices.

The company recalled another 1.5 million vehicles around the world in late March to fix steering problems and again in early May when it recalled close to 52,000 newer model SUVs with faulty fuel meters amid a software glitch. Earlier this month, GM recalled an additional 2.7 million vehicles including older and newer models of various brands identified with five different sets of issues. The company has said that the latest recalls will cost an additional $200 million.

As the recalls pile up, the criticism has not resonated well with investors, who fear an impending impact on GM’s unit sales and profitability this year, and the recalls have put a massive dent on the company’s reputation as a responsible automaker.

Ford too has had recall problems this year, but they have mostly revolved around a single product line - the Ford Escape SUV, for which it recalled close to 700,000 vehicles earlier this month following multiple recalls in prior years.  However, Ford’s recall woes are nowhere close to what GM has faced and investors have been sure to reflect that in the two companies’ stock performance. GM investors in particular fear that non-stop recalls might negatively impact the company’s sales and could lead to a further drop in per share earnings.

New Vehicle Launches

According to automotive research firm, Edmunds.com, GM is scheduled to release 15 new or upgraded vehicles in 2014. Meanwhile, Ford has confirmed the launch of 23 new vehicles globally, with 16 of those in North America alone which also marks 2014 as a record year for vehicle launches. Ford has also unveiled a new, lighter F-150 truck this year, aimed at delivering better fuel efficiency and performance to the best-selling vehicle in America.

Ford is also better at consolidating its operational efficiency, with only 14 different automobile platforms estimated for this year, compared to 25 for GM. That enables Ford to keep expenses in check and share vehicle structures across it brands.

Furthermore, although analysts expect Ford’s revenues to grow 1% this year compared to 2% for GM 2%, by next year, when most of Ford’s anticipated new vehicles hit the market, revenues are expected to jump 6% compared to GM’s revenue growth of 4%. The new vehicle launches have brightened Ford’s outlook, thereby spurring higher interest in the stock.

GM’s Valuation Compared to Ford

It seems to become increasingly clear why investors are currently valuing Ford higher than GM. Ford is currently trading at a one-year forward price to earnings multiple of 10.3x, compared to GM’s comparable multiple of 9x . Ford’s current price to sales ratio of 0.4x is also higher than GM at 0.3x.

Those number do make sense; comparing the automakers’ sales trends for the past three years, it is notable that GM’s revenues have grown at an average annual rate of 5%, while Ford’s revenues have grown at 6% over the same period. Meanwhile, GM’s net income on average has dropped 6% per year over the last three years but for Ford earnings have grown 2.9% over the same period.

Prospects for GM’s Rebound

GM’s unit sales up until last month did not highlight any negative effects as the automaker sold a record number of vehicles in the US for the month of April. However as GM’s vehicle recalls pile up, the situation might drastically change.

Growing recalls create major inconvenience and safety concerns for car owners, in addition to denting the auto maker’s credibility. The possibility of GM’s sales taking a hit in the near future cannot be ruled out, and the stock price seems to have factored in some of this risk. For the stock price to rebound, GM’s recall saga needs to come to an end.

Ford on the other hand continues to delineate financial and operational solidity along with promising growth prospects which has led to Ford’s stock trading at a premium to GM.

What do you think about our views on General Motors? Leave your thoughts in the comments section below, and an analyst will reply to you shortly.

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