The US auto sector is showing strong signs of recovery after facing severe disruptions earlier this year due to a demand slump and several factories being shut down amid the pandemic. Cox Automotive expects October US auto sales numbers to reflect continued recovery after April’s historic low. It expects the October seasonally adjusted annual rate (or SAAR) of sales to come in at about 16.4 million, indicating a slight improvement from 16.3 million in September, though still below the 16.8 million level in October 2019.
Keeping in mind these improving business conditions, let’s see how Ford and General Motors are performing under the current circumstances and use the TipRanks Stock Comparison tool to see which stock offers a more compelling investment opportunity.
Ford has been trying to turnaround its business over recent years as it struggled with aging vehicle models, operational issues and rising competition from electric vehicle makers. The company began a multi-year $11 billion restructuring plan in 2018 under the leadership of its former CEO Jim Hackett. It decided to phase-out unprofitable sedans to focus on higher-margin SUVs, pickup trucks and commercial vehicles and invest in high-growth sectors like autonomous and electric vehicles.
The pandemic made Ford’s turnaround difficult and drastically hurt production and sales in the first two quarters this year. However, the company bounced back and delivered better-than-anticipated results for the third quarter. Notably, 3Q revenue grew 1.4% year-over-year to $37.5 billion compared to a 50% revenue decline in 2Q. Also, 3Q adjusted EPS grew 91% year-over-year to $0.65 driven by a favorable mix of high-margin trucks and commercial vehicles in North America.
However, Ford cautioned that it expects 4Q adjusted EBIT to be between break-even and a $500 million loss due to lower shipments of F-150s as the company is ramping up production for the launch of the 2021 model, higher costs associated with the manufacturing of Mustang Mach-E and Bronco Sport and increased advertising expenses.
The company’s new models, namely Mustang Mach-E, new Bronco line and a redesigned F-150 pickup truck, are expected to boost its sales. Ford is also launching a new, all-electric Transit van for global markets.
Moreover, the company has been entering into strategic partnerships to boost its growth. It has collaborated with Volkswagen to invest in electric and self-driving technology. In June, the two companies announced their plans to produce up to 8 million of commercial vehicles under an expanded alliance. Also, Ford will build a new electric vehicle for Europe based on Volkswagen’s Modular Electric Drive toolkit beginning in 2023.
Effective Oct. 1, COO James Farley assumed the CEO role. Farley intends to continue to implement turnaround measures to reduce costs, accelerate the restructuring of underperforming businesses and build a strong presence in growth areas like EVs and self-driving technology. (See F stock analysis on TipRanks)
On Nov. 3, Jefferies analyst Philippe Houchois raised his price target for Ford to $9.50 from $8.50 and reiterated a Buy rating as he believes that the company’s “two successive and very material” quarterly profit and cash flow beats should reassure investors that it has turned a corner under the new management. The analyst sees a major improvement in product contribution from key replacements and launches beginning next year.
Meanwhile, the rest of the Street has a cautious outlook on the stock with a Hold analyst consensus based on 4 Buys, 8 Holds and 1 Sell. With shares down 11.9% year-to-date, the average analyst price target of $8.84 indicates an upside potential of about 8% in the months ahead.
General Motors (GM)
General Motors is recovering faster-than-expected from the pandemic-induced lows. The company’s 3Q revenue of $35.5 billion was flat year-over-year but reflected a major recovery from 2Q when revenue plunged 53%. Adjusted EPS surged 65% year-over-year to $2.83 in 3Q. The company attributed its 3Q performance to the demand for full-size SUVs, pickup trucks and crossovers, cost management and the results of GM Financial, which gained from lower-than-anticipated credit losses and increased prices for used vehicles.
Deutsche Bank analyst Emmanuel Rosner increased his price target for General Motors to $43 from $35 and reiterated a Buy rating following the 3Q earnings release. In a research note to investors, Rosner stated that the company’s “large” 3Q beat, “strong” 4Q and 2021 forecast and updated electric vehicle strategy reflect that it is “truly firing on all cylinders.” The analyst sees upside to management’s 2021 base case scenario and estimates EPS of $6.50.
Despite the pandemic, General Motors is aggressively moving ahead with its growth plans for an “all-electric future.” It has allocated over $20 billion for the development of electric and autonomous vehicles by 2025. Last month, the company unveiled the much anticipated GMC Hummer EV Supertruck, its first electric vehicle powered by the Ultium battery system.
The company plans to hire 3,000 new employees mainly for software development as it is accelerating its growth plans for electric vehicles. It is investing $2 billion to transition its Spring Hill, Tennessee plant to build electric vehicles, including Cadillac Lyriq. General Motors is also making additional investments at five Michigan plants for future crossover, pickup and Cruise AV production. (See GM stock analysis on TipRanks)
GM has also collaborated with Honda to jointly develop two all-new electric vehicles for Honda based on GM’s global EV platform. The two companies recently signed a memorandum of understanding to explore sharing vehicle platforms and propulsion systems for several core segments.
The Street takes a bullish stance on GM with a Strong Buy analyst consensus based on 11 Buys versus 1 Hold and 1 Sell. The $44.23 average analyst price target indicates an upside potential of 13.5% in the coming months. Shares have advanced 6.5% so far this year.
Income investors who are keen on dividend yield might not find Ford and General Motors attractive right now as both of the automakers suspended their dividends earlier this year, owing to the challenges amid the pandemic. During its 3Q conference call, General Motors stated that it might reinstate dividends around mid-2021 based on recovery in its business and other factors like its capital allocation priorities. Ford did not provide any time frame for resuming dividends.
Right now, General Motors stock appears to be a more favorable auto pick than Ford as indicated by the Street’s bullish outlook and higher upside potential.
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment