Despite the hugely successful initial public offering General Motors (NYSE: GM) underwent last week, the company still has numerous questions surrounding it, particularly its huge pension liabilities. As such, David Silver, an equity research analyst at Wall Street Strategies in New York, believes that Ford Motor Co. (NYSE: F) is the better auto company and more attractive stock right now. Mr. Silver spoke to IB Times to discuss these two auto giants in detail.
IBT: Why do you like Ford better than GM right now?
SILVER: Ford is making better products than GM, Ford is a step or two ahead of GM in terms of new technologies and new vehicles. Ford has a stronger pipeline of new cars, and while GM is trying to play catch-up – they are placing a lot of their hopes on their new electric vehicle, the Chevy Volt, and I don’t know how successful that product launch will be.
GM still has the highest market share in the U.S. at about 18 percent, but this figure has been declining for the past two decades. Depending on the quarter, either Toyota Motor Corp. (NYSE:TM) or Ford has the second-biggest market share in the United States
IBT: How is GM doing in its overseas markets?
SILVER: China is their largest foreign market; they are the second biggest automaker there and their market share is rising. However, building cars in China is not nearly as profitable as it is in North America because foreign auto companies have to enter into a joint-venture partnership arrangements with a local entity. This really eats into their profitability.
Ford is growing significantly in India; while their presence in China is of a much smaller scale than GM. For instance, during October of 2010, GM sold almost 200,000 vehicles in China while for Ford sold almost 50,000.
IBT: What do you see as GM’s biggest problems now?
SILVER: They have two principal problems: the billions they owe in pensions; and their operations in Europe, which are struggling badly.
GM’s new chief executive officer Dan Akerson said he will use the extra cash provided from operations to both pay down pensions and turn Europe around. Well, there’s probably not enough cash to successfully do both. Their pension obligations currently amount to about $27-billion; and their European businesses have been in dire shape for the past decade. These problems are not going away for several years. Unless there is a massive turnaround in their U.S. operations -- which I do not foresee for another three or four years -- pensions and Europe will continue to hurt GM’s growth.
IBT: What is wrong with GM’s European operations? [A few months ago, GM commenced a deep restructuring of its Opel brand in Europe, including the elimination of 8,000 jobs, mostly in Germany. The unit is expected to lose 1.4-billion euros this year.]
SILVER: Their problems in Europe are similar to what their woes in the U.S. were. It became too expensive to produce cars in Europe; they did not have enough pricing power to offset the extremely high costs of production.
In North America, they’ve been able to remove some of the health care costs that were baked into the cost of the vehicle -- so now they can generate some profits, even on smaller cars here. But in Europe, it remains very difficult to produce cars at a profit.
IBT: Were you taken aback by the hype and success of GM’s IPO?
SILVER: I think the [$33 per share] price they got in the offering was great for the taxpayers and the government. I think that if the IPO price had been in the $26-$29 range (which they originally anticipated), then the stock probably would’ve risen by $5 or $6 on the first day of trading, and the U.S. Treasury would’ve gotten egg on their face because they would’ve missed out on a 25 percent appreciation.
Now as time goes on, as foreign investors get involved, the price momentum may continue for a short while. However, fundamentals will eventually kick in and the share price will likely settle in the $30-$33 range.
Moreover, the share price would have to climb to the $45-$50 range before the taxpayers break even on GM.
IBT: Could the interest/hype surrounding GM also be a good thing for its rivals, including Ford?
SILVER: Absolutely, the good things being said about GM can also be applied to Ford and many other automakers, in fact, more so for Ford. Production is expected to improve in North America, South America, Middle East and Asia, while remaining flat in Europe – this holds true for both Ford and GM; however, GM is on the lower end of the pricing game. So, Ford can charge more for the same type of vehicle as GM. Ford enjoys pricing power now.
IBT: What do you attribute Ford’s recent success to? The company’s stock has steadily risen since February 2009, and shares have leaped about 60 percent year-to-date in 2010.
SILVER: In a sense, it was perfect timing for Ford’s CEO, Alan Mulally, who fortuitously mortgaged the company – selling off other brands, etc. -- right before the peak of the financial crisis in late 2008/early 2009. Mulally likely helped steer the company to avoid getting a government bailout. Before the stock market tanked, he started selling plants to raise cash, he attempted to lower the debt, he started to turnaround North American operations, and he renegotiated a new contract with the unions.
Once they got past the worst of the crisis, it was business as usual. They rolled out new cars, gained market share and moved far ahead of GM in their turnaround. It was a mixture of luck and skill.
IBT: Is Ford burdened by a lot debt on its balance sheet?
SILVER: GM has actually eliminated a lot of its debt, when they went through bankruptcy, whereas Ford has been paying down their debt. At the peak, Ford had about $37-billion of debt, GM had about $40-billion. When GM exited bankruptcy, it had about $22-billion in debt, excluding pension liabilities. Ford has paid down approximately $10 billion of debt over the past two quarters and expects to pay another $3.5 billion during the fourth quarter.
IBT: Ford is now trading at just above $16 per share. Does it have much upside?
SILVER: I currently have a $22 price target on Ford for the end of 2011. I had raised by recommendation on Ford to a ‘buy’ in June 2009, right after GM filed for bankruptcy. At that time, I established a $16 price target for Ford for the end of 2010 -- it has now reached that level a little before I had expected, so I think it can still appreciate another 25-30 percent from current levels before the end of next year.
This rise will be driven by steady earnings growth, improved sales in North America, and increasing market share in China, India, Russia, Middle East and Latin America.
IBT: Is there a stigma attached to GM for having received a cash infusion from taxpayers? Or is that overstated?
SILVER: I think that’s true more for investors than for automobile buyers. I believe some stockpickers may be shying away from GM shares because they took the bailout, but the consumers on the ground are not going to refrain from visiting GM showrooms or buying GM vehicles. They’re simply looking for the best car or the best deal.
IBT: GM's new management team is new to the auto industry; is that a liability?
SILVER: Akerson is new to the auto industry – but I think that’s a good thing. The boss at Ford, Mulally, was also new to autos, his background was in Boeing (NYSE: BA) and manufacturing and he’s turned things around at Ford quite successfully.
Problems in the auto sector are decades-old -- by getting someone from outside the industry, they might have fresh new ideas that they’re willing to implement.
IBT: How much stake does the UAW have in GM? And is that a negative thing for the company?
SILVER: Prior to the IPO, the union owned 20 percent of the company, now they hold about 14 percent. The union originally acquired their stake in exchange for some concessions on health care costs, and so it is not going to be a long-term holding for them. They will be gradually liquidating their ownership.
However, if it was to be a long-term position, then having a union with such heavy ownership might be a bad thing for the company.
IBT: What is your near-term outlook for Ford and GM?
SILVER: For GM, they will have some more momentum over the next few months, the stock price will inch higher, as foreign investors increasingly purchase shares and the company basks in the glow of what is perceived to have been a successful bailout and IPO. By the end of January, it should be trading at $35 or $36.
For Ford, I don’t see a big jump in the price right away. They just announced another debt-for-equity offering, which will pressure their share price in the short-term due to dilution, but be a benefit to the stock in the long run. I project Ford shares trading at $17 at the end of January 2011.