Many value investors have been insisting for some time that US auto-makers Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM) are attractive stocks. General Motors Company (NYSE:GM), in fact, was one of the five most popular stocks among hedge funds in the fourth quarter of 2012.
Billionaire David Einhorn of Greenlight Capital made his case for General Motors Company (NYSE:GM) (though his take could also apply to Ford and the auto industry more generally) at October’s Value Investing Congress: Europe should regain profitability in the next few years, there are significant opportunities in China, and U.S. consumers will soon have to buy new cars as their current auto fleet is nearing record longevity. GM was one of Greenlight’s largest holdings by market value at the end of December. Appaloosa Management, managed by David Tepper, included both Ford and GM among its top ten picks.
February U.S. auto sales growth was down from January–in particular, car sales were flat–but the market in the first two months of 2013 still showed a strong improvement from a year earlier, and even in February Ford Motor Company (NYSE:F) and GM produced growth in the mid- to high-single digits (General Motors Company (NYSE:GM) was held back by a fall in car sales). The market share of each company is up in the last year. Of course, this has come as bad news continues to trickle out of Europe: it’s unclear what effect the Cyprus crisis will have on the macro situation, but certainly we are much less convinced on either the Europe or China legs of Einhorn’s thesis.
Revenue was about flat at both companies last year compared to 2011, and net income declined significantly. Ford Motor Company (NYSE:F) generated 65% of revenues from North America and 21% from Europe; GM got 63% of its business from North America and 14% from Europe. In both cases European sales numbers have generally been declining in the last couple years, while revenue has been up in North America.
Both Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM) currently trade at 9 to 10 times their trailing earnings, so the companies could prove undervalued even if they maintain their business at current levels. If they can turn in moderate growth in developing markets and low growth in the U.S. then they would be in position to improve earnings as long as Europe does not continue to deteriorate.