Why GM Offers More Value for Investors Than Ford

Cars and Drivers

Published: May 15, 2014 7:50 am

Last Updated: April 28, 2020 6:56 am

Last year was a very good year for carmakers. They sold more cars — 82 million — than in any of the past five years, and sales are expected to reach 85 million this year, according to IHS Automotive.

But the year got off to a rough start in the United States, where unusually cold, wintry weather gripped much of the country for much of the first three months. That wasn’t the only problem, though.

General Motors Co. (NYSE: GM) recalled some 2.6 million cars to fix a defective ignition switch that has been linked to 13 deaths over the past decade. Worse, the company apparently made a conscious decision to take its chances rather than pay for a recall. Welcome to the corner office Mary Barra.

Ford Motor Co. (NYSE: F) is also replacing its CEO this summer. Alan Mulally, who is generally acknowledged to have reversed the company’s fortunes in his eight years as chief executive, is retiring even as Ford faces some issues with both revenues and sale.

GM has seen its shares slide 15% so far in 2014. The stock closed at $34.94 on Wednesday, and the consensus analyst price target of around $43.00 implies a potential upside of about 23%. Shares have traded in a range of $31.13 to $41.85 over the past 12 months. With a fiscal year 2015 earnings per share (EPS) estimate of $4.76, it is valued at 7.3 times next year’s expected earnings.

Ford shares are up about 2% so far in 2014. The stock closed at $15.75 on Wednesday, and the consensus analyst price target of around $18.25 implies a potential upside of about 15.8%. Shares have traded in a range of $14.30 to $18.02 over the past year. With a fiscal year 2015 EPS of $1.91, it is valued at 8.25 times next year’s expected earnings.

Whatever these numbers say, GM’s recall issues threaten to weigh more heavily on the company’s share price performance than actual sales of new cars. But the company could dodge another bullet there. According to recent data from Kelley Blue Book, only 5% of new car buyers would not consider buying a new GM car as a result of the ignition switch story and recall.

While consumers may forgive, they do not appear to forget. Nearly half — 48% — remembered the 2010 recall by Toyota Motor Corp. (NYSE: TM). That recall and the attendant congressional hearings, fines and lawsuits cost Toyota billions of dollars. GM’s recall has already cost the company $1.3 billion and counting.

The other thing to remember about the Toyota experience is that the company bounced back in about two years and sold 9.98 million vehicles in 2013, just ahead of Volkswagen’s 9.73 million and GM’s 9.71 million.

Is GM or Ford the better value pick? Based on the numbers, it’s got to be GM. But as the sports writers are fond of saying, it comes down to the intangibles. Can GM’s new CEO navigate the storm that hit just weeks after she took office? Can Ford’s incoming CEO replace the legend? GM has the tougher path forward, but so far Barra has managed to maintain damage control, and if she can continue to do so, GM has some room to run.

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