(By Kevin Donovan) Debate all you wish about the propriety of the life jacket tossed by the taxpayer to the U.S. auto industry, but its comeback is undeniable. General Motors (GM) is once again leading the world in sales, and Ford (F), which was able to forgo government aid, is confident enough to pay a dividend again.
Yet, Ford and GM shares have each lost almost 30% in value over the past year, compared to a 10.3% decline in price for the Standard & Poor's industry group.
Ford is trading at just 2.26 times trailing 12 months' earnings, 3.48 times enterprise value to EBITDA. Operating margin the latest quarter was 5.65%.
General Motors, meanwhile, sports a P/E of 6.73, EV/EBITDA of 1.38, and operating margin of 4.9%.
Compared to the industry and the market, these metrics should be screaming "Buy Me." The industry average P/E is 21.2 with an operating margin of 3.2%.
In the latest quarter, Ford reported earnings of $0.39 per share vs. the consensus estimate of $0.35. However, estimates for the current quarter average $0.35, which is down from $0.43 earlier this year, according to First Call. Also, weighing on Ford is its reliance on debt in its capital structure. Debt to total capital is 79.8%, compared with 26.8% for the industry as a whole.
Meanwhile, GM reported quarterly earnings of $0.94 per share, a positive surprise of 10.3% above the consensus $0.85. But GM's current quarter consensus estimate has decreased over the past 90 days from $1.24 to $0.90.
So how come the stock market has punished these stars more than the rest of the automotive firmament?
We can think of several reasons – some quantifiable, and another less palpable.
First, despite positive earnings surprises in the first quarter, estimates have come down recently. But the strongest headwinds have been blowing from the macroeconomic portents. The dismal April jobs report has thrown into question the sustainability of the U.S. economic expansion and income growth, which casts a pall over the consumer discretionary sector.
However, we think fear of yet another dip into recession is overblown. For one, the worldwide focus has shifted to growth from austerity, as evidenced by the election results in France and Greece and the so far successful "soft landing" in China.
On the psychological front, Ford and GM's poor reputation makes them more vulnerable in this environment. They are still "show me" names. We would be buyers of both at these levels.