U.S. Auto Stocks Gain Investor Appeal

Ford’s shares are down more than 25% in the past two years, as the S&P has risen 20%. GM’s shares are off more than 30%, which makes some sense because Ford is viewed as the better-run company, and GM has more exposure in Europe. Ford also has been aggressive in restructuring its European operations. It will shutter three plants there and is:

Projecting profitability in Europe by mid-decade; targeting long-term operating margin of 6-8 percent; European loss for 2012 expected to exceed $1.5 billion.

Add this to Ford’s success domestically, and the company appears ready to do well in the next two or three years, and possibly better thereafter.

GM’s trouble in Europe is much greater because of the relatively large size of its Opel and Vauxhall operations. Governments in the region and the powerful auto worker unions have resisted plant shutdowns and layoffs. But losses in Europe pulled down GM’s profits by 41% in the most recent quarter. The manufacturer must do something. The question is what.

Most likely, GM will negotiate a reasonable peace with governments and unions based on the rock solid claim that it cannot afford to continue to lose money as it has for years. There is no way to tell what the settlements may look like. Among the options is that GM combines its operations with one of Europe’s financially weak car companies. Even that kind of move would mean job cuts, which makes them inevitable, even if GM stays in Europe.

GM’s ultimate leverage is that it can leave Europe completely. Closing operations there or selling most of its properties would cost as much as $13 billion, according to some analysts. That is a sane price to pay if losses over the next several years will total as much.

GM has one advantage Ford does not. It vies with Volkswagen most months as the largest car company by sales in China, the world’s largest car market. Car and light vehicle sales in China have slowed. However, given the small penetration of auto ownership to the entire population, long-term growth in car ownership is certain.

GM and Ford have taken their beatings. Each has a path to improve earnings, and each will take it.

Douglas A. McIntyre