Don’t get me wrong - I’m certainly not arguing that either General Motors or Ford is going to go under tomorrow - but really, what’s the investment case here?
At least Ford is making some money from selling cars - its auto business accounted for all of 25% of the company’s latest quarterly earnings. (The rest came from car loans.) As for GM, which released its third-quarter numbers today, while overall net income was $440 million, the actual car-making business lost $130 million, meaning the company was carried by its financing activities. GM also lowered its forecast for annual profit and said it will cut up to 12,000 jobs in Europe.
To move cars, both companies are more reliant than competitors on buyer incentives that (IMHO) are crushing or have crushed their profit margins. Ford spent an average of $4,312 per vehicle in incentives in June and GM was at $4,322, compared to $2,878 for Toyota and $1,812 for Honda, according to CNW Marketing.
Both companies are carrying huge liabilities because of costs for health care they must provide to retirees and their dependents. GM’s health-care liabilities stood at $63.5 billion at the end of last year, of which all but $10 billion was unfunded, while Ford was on the hook for $32 billion. Just for comparison, GM’s current stock-market value is about $22 billion and Ford’s is about $24 billion.
Both companies are indebted by multiples of their stock-market values. GM owes its bondholders about $120 billion, and Ford’s debtholders are owed about $107 billion.
And when it comes to performance, widows-and-orphans stocks these are not. GM shares lost about half their value in the three years through 2002, rose 45% last year and are down 27% in 2004. Ford stock slid about 70% in the four years through 2002, jumped 72% last year and is down 18% this year.
I guess that leaves the dividends - GM stock changes hands on a trailing 12-month yield of 5.1%, second-highest in the DJIA after Altria, and Ford is on 3.1%. Still, with GM’s credit rating being lowered to BBB- by Standard & Poor’s today, and all that debt, I’d have to wonder how secure those cash flows are.
I’m a high-yield investor myself when it comes to stocks, but I’d argue that GM is an excellent case of the importance of looking past a high dividend yield and examining the business itself, because what I see there would certainly scare me away from being a buyer. YMMV, and again, I’m not saying GM or Ford is in imminent danger of going under, but what’s the future for these companies?
All figures from Bloomberg unless cited otherwise above.