In 2015, Ford produced impressive revenue of $150 billion with a record net income of $7.4 billion. General Motors generated $9.7 billion in net income on $152 billion in revenue. A stronger economy and lower gas prices have been responsible for the record year in the US Auto industry. Ironically, the two auto giants’ success was not met with shareholders’ approvals. For 2015, Ford share prices dropped close to 10% and GM by 3%, significantly underperforming the S&P 500. Currently, Ford trades at just 7 times its trailing earnings (vs. GM’s 5x). Low earnings multiple usually implies a lower growth rate in futures earnings, but Ford & GM are still priced at 6 times (5x) their forward earnings, not being able to break out the trading range since 2011. Relatively, both measures are decisively less than half of the valuation of the S&P 500.
One cannot resist asking the obvious question: What are Ford’s and GM’s shareholders looking for?
A prolong low PE along with strong earnings may only suggest that there is significant risk perceived in sustaining the future growth. Although General Motors remains the largest market share holder in the U.S, followed by Toyota and Ford, the real risk is that Toyota held the largest global market share at 10.23%, followed by Volkswagen Group, GM the third, and Ford came in at a distant sixth behind Renault-Nissan and Hyundai-Kia. As significant profits in North America, Europe and Asia have contributed to Ford’s good year, the South American market still presents challenges. Although Ford is not as exposed as GM to a slower Chinese economy, its growth story is still dependent on China as fixed costs come in to fund growth.
GM’s strength in the North American and the significant presence in Chinese markets helped to reduce the impact from the currency headwinds but saw similar difficulties in Europe and South America. Given GM‘s flexibility in cost control, it is hopeful to narrow losses in this region and did follow with near breakeven results in Q4. In the meantime, Ford is guiding to worse losses in full year 2016 than 2015. Therefore, it is a legit concern that Ford is lagging GM in South America and China.
On a more basic level, Ford’s “One Ford” plan, a “branded houses” architect, was implemented to reduce the number of brands and the number of platforms upon which various models are built. This strategy is to increase efficiency and reduce cost, with the idea that the simpler is better. Though, the prerequisite is that there needs to be a superior parent brand reputation which sub-brands can be leveraged from. This parent brand should stand for something, such as quality, innovation, or being adaptive. In 2007, Ford had 27 different vehicle platforms, 12 in 2015, and will drop to 8 by 2019. Today, Ford and Lincoln are the only two remaining significant global Ford brands. Incidentally, Ford’s net profit margin has risen from 2.3% to 3.8% over the same time period.
In contrast, General Motors, a “house of brands” architect, owns and runs a plethora of brands. This strategy is set to increase growth and reduce overall risk by serving many and different markets, albeit at a higher cost. GM has created or purchased local brands to compete in international markets, but not aggressively marketing its existing brands in those new markets. GM owns thirteen brands: Alpheon, Chevrolet, Buick, GMC, Cadillac, Holden, HSV, Opel, Vauxhall, Wuling, Baojun, Jie Fang, and UzDaewoo in 37 countries. GM has experienced annual 6.98% earnings growth (vs. Ford’s -0.43%) over the last 5 years. Therefore, the difference between a house of brands and branded house strategy is simply a choice of different risk and return tradeoff.
One cannot resist asking the obvious question:
Which branding strategy will fare better in the future environment?
For most people, the decision of buying a lxury car is almost a religious one. You are not buying Jaguar because it is a Ford car (not since 2008), nor the scandal of Volkswagen will stop you from getting your first Porsche. What this means is, at least in this segment, that individual brand loyalty is more important than the overall branding architect of the parent company. That being said, when buying a car based on functionality or cost, which is the majority of the car sales, being able to choose from a house of brands is always a good thing.
Since 2010, the year GM filed for bankruptcy, the perpetual bear has claimed that automakers were “disadvantaged at best and disrupted at worst.” This may explain why GM shares have decreased by 10%, Ford by -18%, compared with S&P’s increase by 71% since then. Given the expected repeat of 2015 into 2016 in the US auto market, a continued strengthening economy especially in South American and China, stable and low gas prices, both Ford and GM are considered a good buy with GM in the lead.