2018 could be the year of the automaker. Although GM had to take on a government bailout to ultimately survive and Ford did not, General Motors has recovered well and is a powerful contender in its industry once again. Should you be investing into GM for 2018? Maybe you should stay strong and go with Ford? Or would investing in both automakers be the best course of action to take? Here’s an analysis of both organizations in a showdown of GM vs Ford stock.
What Does General Motors Bring to the Table?
There’s 3 key points to consider when you first take a look at GM as an investment opportunity.
- It’s a very affordable investment, no matter what how one looks at it.
- With strong levels of being undervalued compared to its fair market price, 2018 looks to be a year where it can outperform expectations and hit target values on the market right now.
- Consistently low crude oil futures will help GM be able to sell vehicles that are a bit more profitable for the organization.
As the markets have looked to finish 2017 strong, some up over 10% in total growth, General Motors has seen a reduction of 20% in their stock value when dividends are excluded from the equation. What does this mean for the average investor? It means that the company could be undervalued by over 30% at the start of 2017. That’s why the stock could do very well indeed over the course of the year.
What about the ignition switch recall issue? Millions of people received recall notices for their automobiles because of faulty ignition switches on many models. Both sides of the issue are right. It is a short-term issue that the automaker is facing and the company should face severe consequences for their actions. The fact is that any corporate crisis that doesn’t result in the elimination of the company [think Enron] is a short-term issue. It will fade away. The recall issue will fade away from GM, probably at the tune of a $2 billion fine and litigation from injured parties that could reach nine figures.
How much a company is loved or hated doesn’t really matter in the world of investing. Comcast is proof of this. The average person hates Comcast. Their customer service is extraordinarily bad and example after example of this fact hits the internet almost every day. Outages occur in TV, internet, and phone almost daily. Despite all of this, the market has valued Comcast at almost 17 times when its earnings happen to be.
The same principle can be applied to General Motors. It offers investors a Low EPS estimate that is nearly triple that of Ford’s estimates. On the high end of the spectrum, GM is also offering investors a high end EPS estimate of over $4.30. That ultimately means that the market is pegging GM’s value to be about 9 times the general market. When you put in the dividend yields for GM, which happen to be at 3.6% and the best in the industry today for the major automakers, then you come up with an equation that shows how GM could be an amazing investment opportunity.
There’s also the fact that General Motors was able to cleanse away some of its debt thanks to the Chapter 17 bankruptcy it filed. When 2018 values are considered, GM is likely to be trading at an 18% discount when compared to Ford when future earnings are looked at. If you don’t mind a little extra risk for your rewards, then General Motors could be the recipe to 2018 investment success.
What Does Ford Bring to the Table?
If you’re thinking about investing into Ford shares, then there are also 3 key considerations that make it a tempting investment as well.
- Ford has made a large investment into the Chinese market that gives it a natural growth advantage when compared to its primary competition.
- There have been huge efforts to increase the efficiency of the European assembly plants that have created losses for the company, which when fixed will lead to better earnings in 2018.
- The introduction of several new vehicles to the product line will potentially pay off in 2018 since Ford’s market share has increased in virtually every targeted population demographic.
It is true that 2017 was a tough year for the automaker. Some of the rating downgrades on their stock are likely justified. It was definitely a transition year for Ford and stagnant sales only helped to fuel the downgrades that analysts were willing to put on their shares. There is a lot of pressure on this stock right now and the low end EPS estimates are barely above $1.25 per share. On the surface, this looks like a risky investment at best.
The problem here is that most investors are looking at Ford’s short-term problems and turning them into long-term problems. The same corporate crisis situations that Ford faces are going to fade, just as they will with GM. The company looked at 2017 as a transition year before it ever began. They sit poised and ready to turn up the heat for a 2015 comeback.
Just look at the European market, for example, as proof of this. Because of the economic and political issues in Europe that persisted over all of 2017, Ford forecasts a $1 billion loss on the continent for the year. With enhancements on the assembly line, financial recoveries on the horizon, and a bit of political stability [with the exception of Russia] looming in the future, Ford is projecting their losses to be $250 million in Europe in 2015.
That means an improvement of $750 million to the general revenue fund. A nine figure improvement in any market is difficult to ignore.
Then there’s the huge gains that Ford is seeing in China. They experienced a 20% gain in sales in 2014, eclipsing the 1 million vehicle mark for the first time. As new vehicles continue to roll out for this market and Escorts and Taurus models hit the market, it is expected that there will need to be an increase in overall vehicle production. That doesn’t mean that Ford isn’t still behind when it comes to other automakers in these markets, including GM, but it does mean that their sales growth could likely increase its share growth.
The traditional philosophy of needing money to make money is true. Ford took the chance to invest toward its future in 2017. That’s why 2018 looks to be the year where the patience of many investors will likely be rewarded.
Now How About a Unique Idea…
In looking at the options of GM and Ford for 2018 investment possibilities, here’s something to consider: include both of them into your financial portfolio. Both automakers provide dividend yields that are above 3%. There is a lot of upside to both stocks because they are both undervalued for their respective positions within the industry. The beginning investor typically purchases shares in just one company in each industry, but maybe consider going with both here.
If you’re a little short on investment cash right now, then Ford is going to be your better option. Investors can pick up two shares of Ford for every 1 share of General Motors, so there’s going to be a better chance to pick up some value in the passive income market. If you’ve got a decent wad of cash, but don’t want to invest into both automakers, then General Motors looks to have the better overall year from a direct profitability outcome.
Why General Motors? It all boils down to their bankruptcy. They are carrying less debt than Ford and have recovered well. Some investors might put the strength of Ford and the fact that they didn’t accept bailout funds as a premium point of emphasis, but the simple fact is that these points don’t carry financial weight any more. During the years of the Great Recession? Absolutely. Ford would have been far and away the better solo purchase.
For 2018, however, General Motors has some clear advantages, especially in the EPS department, that make it a side by side superior investment opportunity than Ford.
Here’s a Wildcard Scenario to Consider
There’s one company that could play spoiler to all of these scenarios: Cadillac. This brand has a simple, tragic tale. They make fantastic products, but have sales figures that can only be described as horrible. Luxury sales have been up 10% for 2017, however, and Cadillac is going through a massive branding overhaul that looks to increase its saturation and positive influence on the general public. That could affect GM and Ford in either positive or negative ways in 2018, depending solely on sales performance.
The bottom line is that both GM and Ford look to be about 30% undervalued. From a sheer asset point, this means General Motors is the better purchase. For the investor looking to snag a great deal, however, both automakers look to be on the brink of something great in 2018.