Cool Cars Don't Equal Hot Stocks

 | Jan 09, 2012 | 11:28 AM EST
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We've got news of new cars galore today. Midsize cars from the Big Three that could challenge the Japanese, cars with technology that appeals to youth, cars that show off U.S. craftsmanship in a way that makes the Japanese seem, well, equal to, not better than Ford (F), GM (GM) or Chrysler.

If only it mattered to the stocks. First, we don't care about Chrysler unless we are trying to buy one. The idea of buying a European car company because of a strong Chrysler showing is pretty fanciful. Fiat's good. So what?

Ford and GM? Sure we care what kinds of cars they make because one day it will surely matter in terms of share and perception. It sure doesn't matter now. What matters first is the number of cars that could be sold in the United States. Autonation (AN), the big retailer says it might be as many as 14 million, which is already up more than 500,000 units from the last projections. That matters because the more car sales the less discounting so the gross margin per car from full price sales might be a positive.

Second, is how many cars will be sold in Europe because Europe is a big swing for Ford and GM. Here you have the euro crisis smack at the heart of the potential earnings. We know that Germany is still doing well, but the whole continent will be a source of weakness, not strength, and that means no matter how many cars are sold in America we can expect numbers to come down.

Third, when it comes to GM, is China. It doesn't matter how many cards have been sold in China what matters is that rates must come down quickly for anyone to think that GM has upside from China. Right now they haven't come down fast enough. China and Ford just reported high single digit growth in China, good news, but not enough to offset Europe.

Fourth, it's the gross margins. Ford locked in some very high prices last year for its raw materials, which means there can be no commodity upside even as aluminum, steel and plastics have all come down. We don't even know about GM as it is truly a terribly reporting company and it doesn't know what to say about such matters.

Fifth is capital structure. Ford already raised the dividend. It yields 1.7%. That's no protection. Again, we have no idea what GM will do.

Finally, the balance sheets and stock issuance. The balance sheet for Ford keeps getting better and better, so it might be able to offer better terms for new cars, which is terrific. Who knows GM? The one thing we need to be worried about when it comes to GM is stock issuance. The Obama administration has pledged not to sell stock down here. A GOP administration has made no such pledge so the stock could really be banged down come the election.

Notice, not once did new cars matter in this litany. You own these stocks because you think that they are cheap and one day will get so cheap that they will be bought. With that in mind, Ford is cheaper than GM and can be bought with limited downside.

Otherwise, watch the car show to figure out what car you want to buy, not what stock you want to own.

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