Time to Buy GM and Ford?

Posted By on June 7, 2005

Domestic automakers have had a tough slog this past year, of that there is no doubt. Poor planning on the part of executives at GM and Ford deserve the majority of the blame, although internal costs be they union (Europeon or domestic), the US economy and the high cost of oil are understandable excuses.

Ford v. GM stock price
Chart comparing GM and Ford over 2 years

Nevertheless, the stock in both companies looks attractive to those desiring to generate better than average returns over the next few years in comparison to others in their industy. Rightsizing of companies is big talk but these changes will take time as the UAW contracts dictate pay even when plants are closed. The CEO of GM, Richard Wagoner Jr., although attempting to put a positive spin on management and labor working together, still see some large boulders to move. Healthcare cost is a major cost that is way out of balance. Negotiations have saddled automakers with some extremely large expenses in dealing with these healthcare costs.

Comparing Ford and GM, the inventory numbers are looking a bit better for Ford. They seem to be able to move cars without the extreme measures GM is attempting. Inventories at Ford are 11% higher than normal which isn’t good, but considering the predicament they are in might be considered ‘ok.’ Light truck inventory is a bit higher and a concern. (must be related to consumers concern over the high price of fuel?)

I believe that as both these companies ‘slowly’ grapple with operating in this sluggish economy and the higher fuel cost, most of the damage to stock prices has been done. The risk of these stocks moving lower is no longer the biggest concern; stagnation of price is highly probable. In talking to a couple automotive people, the consumer buying cycle for cars should be returning and IF Ford and GM can introduce some of their new models at an accellerated pace (this is the talk) they might be ready to attract these returning customers. I am investing ‘lightly’ in Ford with the anticipation of better 2 to 5 year returns than the S&P 500 over the same period.

Rich’s advice: Ford (F): Accumulate under $10 with 2 to 5 year outlook.


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