Value trap, or pure value? I'm talking about the auto stocks, specifically Ford (F) and General Motors (GM) , and I am just wondering when they are going to get out of their own way and start to go higher.
Let's start with General Motors. On Monday GM caught a very thoughtful upgrade from Adam Jonas, the auto analyst at Morgan Stanley. Adam came on Halftime with me and the gang and he spoke about how infrastructure spending could be good for the company as it can spur pickup sales, the most lucrative product line they have.
Scott Wapner then asked about whether the recent American strong sales meant much and Jonas said no. I asked about whether their autonomous driving work has meant anything. Nope. He wasn't budging from the infrastructure story.
At the same time he mentioned that his favorite remains Ford Motor, which, frankly, has been a terrible stock, just terrible, for ages.
What do you do with these two? Let me give you what I think are the pros and the cons, with the latter first.
Lots of bears in these stocks -- and there are plenty given that GM sells at six times earnings and Ford at seven -- believe these companies are just wasting assets. Ride sharing, the cost of ownership, the spend required to go electric and autonomous, are just too great to bear. GM has the ability to fall back on China, its largest market. Don't worry, they are made in China so, even with President Xi making nice last night about imported cards, they, so far have avoided any hurt at all in trade-war talk. Ford has much less China so there's less upside.
Plus, Ford's been having such a hard time in overseas markets where it has been losing fortunes seemingly forever.
Then there's their raw costs going higher because of the aluminum and steel tariffs. And there's the inability to build new factories in Mexico where labor and the peso are so cheap. Mercedes and BMW are about to unleash a huge number of cars from Mexican plants built when Ford scrapped its move because of pressure from President Trump. Plus, there's the peak auto thesis, which never seems to go away.
But how about the bull case: First, it's not like these companies are losing money. GM is supposed to earn $6.32 per share this year and it is a $37 stock. Analysts are looking for $1.55 for Ford. Now the analyst community is looking for down numbers next year so that's not much solace.
However, these companies spew cash. They have the ability to raise their dividends, which are already well above average, GM's yield at 4% and Ford's at 5%. What happens if employment growth continues? These numbers will be beaten, as GM seems to have beaten them in the month of March. What happens if lucrative pickup sales just keep picking up? Again the numbers will be beaten. What happens if GM begins to get credit for all of its autonomous driving prowess and electric vehicle leadership? What happens if Ford, instead of trying to be a world car company just concentrated on where it can make big money, let's say by getting out of Latin America? A shrinking Ford would become a terrific stock with up numbers in 2019 and a good yield.
To me there are more things that can go right here short-term than go wrong here. Yet, nobody thinks like that. They are just shunned and GM barely rallied on Morgan Stanley's very important upgrade.
To me this is the problem with this market. Value doesn't get rewarded because when anyone spots value they think, trap. Ford's stock has been terrible for ages. However, it has it within its capacity to stop losing money overseas and to refresh its entire product line. GM? I think it can report much better earnings than many fear.
That said, these stocks have kept portfolio managers from outperforming for ages. I can't recommend them for anything but a trade going into earnings. But I think they are not deserving of the scorn they receive.
Still, they have to do something to get new shareholders. My suggestion to these companies? Stop losing money where you can. Stop making cars you can't make big money on. And stop trying to be the largest. Go for the most profitable. Then you'll get the shareholders you need to have your stocks move up; tall order to ever shrink to have your stock grow. Yet, that's exactly what has to happen to get people to change their minds about two stocks that are about as hated as hated can be.
Random musings: Have you seen the parts makers? Magna International (MGA) , Lear (LEA) , BorgWarner (BWA) ? These are on fire. How bad can the auto business really be?
