Ford Vs. Government Motors

Intelligent Investing Panel
Ford Vs. Government Motors
Alexandra Zendrian, 01.05.10, 6:00 AM ET 


Things are looking up for the American automakers this year. General Motors is restructuring itself and is winding down its Saab brand. But though there seems to be more confidence in GM now than there was last year, Ford is giving GM a run for its money. These two companies could both be victorious, or one could leave the other badly bruised in the battle for top car company in 2010.

General Motors probably wants to forget 2009–the year that it was forced into bankruptcy. It ended the year on a higher note; GM’s 2009 third quarter revenue was $28 billion, up $4.9 billion from its second quarter revenue.

The company has also benefited from stellar sales in China. (See "Beleaguered At Home, GM Thrives In China".) Matt Lloyd, chief investment strategist at Advisors Asset Management, says investors looking at this sector shouldn’t limit their field of vision to U.S. sales. "With expanding markets in China, India and Brazil, one should not discount the potential rebound of this market, though it may take a year or two before the rubber meets the road," he says.

Because of GM restructuring, Lloyd places his bets on GM having a major advantage over rival Ford Motor Company. "Sad to say, but with regard to Ford’s noble fiscal and management controls, they may find themselves at a disadvantage in the next decade," Lloyd says.


Ford hasn’t been holding any punches by selling of some of its pieces. It confirmed the sale of Volvo to Zhejiang Geely Holding Group Company Limited at the end of last year. Ford’s third quarter revenue was $30.9 billion, up from $27.2 billion in the second quarter.

David Whiston, Morningstar analyst, sees Ford picking up some of GM and Chrysler’s pieces. To clobber GM in this battle, Ford needs to create a car for consumers to trade up for in its Lincoln brand for when the economy recovers more, Whiston says. "A strong luxury group will increase profits because it will allow Ford to sell to all consumer variants while retaining current Ford customers," he said in a recent report.

There was also an amendment Ford made that will mean less debt coming due in December 2011. "The revolving credit facility previously had a balance of $10.7 billion maturing December 15, 2011," Whiston said in the report; with this amendment, $7.9 billion of this debt will be repaid in 2013 instead.

There are still a lot of hurdles out there for the car companies before they can get on the path to success. Rodney Johnson, president of HS Dent Investment Management, says GM could do well this year if the company cuts down on its staff and plants.

Johnson sees Ford as the winner this year among the American car companies, as it has been picking up market share from dealerships that have closed. In the sector overall though, Johnson sees unwavering demand in specialty car makers, such as Bayerische Motoren Werke AG (BMW), Mercedes-Benz and Lexus, because they don’t have the same huge footprint as the bigger car manufacturers, but it also means that they don’t need to make as many sales to see profits.

Another major hurdle involves the state of our economy. High unemployment rates and lack of available credit will not help car sales, notes David Joy, chief market strategist at RiverSource Investments. The latest Bureau of Labor Statistics report from November cites unemployment at 10%.

Joy sees the automotive industry continuing to improve through 2010. He notes that the average monlthy rate annualized of sales needs to reach at least 12 million. Car sales from October and November are getting closer to this point, at 10.5 million and 10.9 million car sales respectively. "While this is not the 16 to 17 million units seen during the last expansion, it is well above the 9 million annualized rate seen in the first six months of last year," Joy says.

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