Wondering When to Buy General Motors, Ford Shares? Not Now

 | Apr 28, 2017 | 6:15 AM EDT
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General Motors (GM) and Ford (F) provide the markets with an excuse each quarter to look at their earnings results and respond with a one-word description: "blah!" Ford reported earnings on Thursday, and General Motors is due to report today before the bell.

But investors should not hang on every word from the automakers, like they once did. As the Nasdaq powers through new highs and Amazon (AMZN) shares jump after earnings, the biggest threat for a long-term auto investor is irrelevance. I followed auto stocks for 11 years for Lehman, Donaldson, Lufkin & Jenrette and UBS, and I know the pain of being ignored. To say there has been '"group rotation" out of the auto stocks is to understate a movement that has been occurring for the past 15 years.

It also explains the relentless bullishness of current auto analysts (of course, they are not as good as we were back in the day, when we walked five miles to our offices --uphill, both ways -- to get quotes from our Quotrons) on Tesla (TSLA) .

Musk's company is perceived as "tech-y" and therefore any savvy auto analyst is going to want his or her name attached to a stock that actually rises occasionally. Of course, tech-y Tesla couldn't even get the most basic autonomous driving technology, Automated Emergency Braking (AEB,) on new models for the past six months, while, as Consumer Reports noted, Toyota proceeds AEB on the entry-level Corolla, but, hey, that's just a detail.

But let's go back to the old-fashioned car makers. The slide in Ford's earnings presentation describing automotive key metrics is incredibly telling. It's like a Murderer's Row of bad news.

  • Worldwide Wholesales: down 1%
  • Global Market Share: down 30 basis points
  • Automotive Operating Margin: down a whopping 440 basis points.
  • Automotive Pretax Income: down 43% to $1.965 billion

GM's comparisons are easier, since that company didn't have a new version of its highest-volume product (The F-Series for Ford) in the first quarter of 2016. Really, though, the Big Two face the same existential problem that is noted in an earlier slide in Ford's presentation. Ford has $28 billion in automotive cash. That is money that is being held in the manufacturing business (so, it excludes Ford Motor Credit's balance sheet).

That $28 billion cash hoard represents 61% of Ford's market capitalization. Amazing. If you think that the equity markets are giving Ford any credit for that low-earning asset, though, you are just not paying attention. Musk certainly doesn't have that problem, but Tesla's inflated valuation allows him to find his business via equity offerings.

So, Ford's veteran CFO, Bob Shanks, has a mountain of liquidity to ensure the company never again has to mortgage its Blue Oval trademark, as it did in 2009. So what? The market is as scared of "another Lehman" as it is scared of consistently paying cycle-high multiples for companies that -- unlike Ford -- do not consistently produce high-quality cash-enhancing earnings. It just doesn't matter.

So, hopefully that was not too depressing. Owing to my background, though, I am constantly asked "when should I buy Ford and GM stock?" The answer is: not now. Unfortunately, these stocks are irrelevant in a period of robust sales -- "Peak Auto" -- and are destined to underperform the broad market indices.

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