A seriously undervalued $60bn stock

This company has significantly outperformed its closest rival over the past few months, and it is now analyst Rodney Hobson’s favourite stock in this sector.

13th November 2024 08:13

Rodney Hobson from interactive investor

Two policy areas look likely to dominate the agenda when Donald Trump resumes the Presidency of the United States in January: tariffs and oil exploration. Trump has pledged to raise tariffs to protect American industry and to ramp up oil drilling. Both policies could help US car manufacturers.

Ford Motor Co (NYSE:F) looks to be doing pretty well on the sales front already. Total vehicle sales increased 15% to 172,756 in October compared with the same month last year, with the biggest rise coming in hybrids, which were up 39%.

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However, there were a couple of black spots. Car sales slumped 27% and electric vehicle sales also slipped at a time when various governments are demanding that showrooms try to make their contribution to saving the environment. Trump will not let this bother his administration unless his new best friend Elon Musk, owner of electric vehicle maker Tesla Inc (NASDAQ:TSLA), makes a nuisance of himself. See Keith Bowman’s analysis of Tesla ii view: Tesla stock rockets on bullish 2025 outlook

Ford further worried investors by revealing that although revenue rose 5.5% to $46.2 billion in the third quarter, net income fell 25% to $900 million. Full-year earnings are likely to be at the bottom end of somewhat optimistic previous guidance, with electric vehicles continuing to lose money. Given that Ford has a higher inventory level than normal – 91 days supply compared with a target of no more than 60 days – there is a serious danger that prices will have to be reduced to clear stock.

There are also worries that cash flow is being squeezed by higher capital expenditure, raising concerns that the dividend will be reduced. Hence the yield of 5.5%, quite high for American stocks.

Yet management remains positive, especially in the light of the strength of the core truck business. It will take time but by this time next year we should be seeing the benefits of investments

Source: interactive investor. Past performance is not a guide to future performance.

There are far more positive signs at General Motors Co (NYSE:GM), which is gaining market share and, in contrast to Ford, is increasingly enthusiastic about electric vehicles. Revenue rose 11% to $28.8 billion in the third quarter, well ahead of analysts’ expectations, as higher prices held, although net profit disappointingly slipped 0.3%.

Sales even improved in China, a problem market for many manufacturers in recent months, although that could change in the new year if tit-for-tat tariffs become the norm when President Trump takes over.

However, it is the balance between traditional vehicles and electric ones that is exciting at GM. Thanks to judicious investment, its assembly plants are flexible and the long-awaited turnaround in its fortunes looks to be underway.

Net income for the full year is now confidently expected to clearly beat the $10.1 billion achieved in 2023, with a transition from losses to operating profits in electric vehicles coming closer as GM takes its share of the US electric vehicles market into double figures. The aim is to make 200,000 such vehicles this year.

Chief executive Mary Barra points to improvements in the distance that electric vehicles can cover between charges and to a reduction in the cost of battery cells.

GM shares have been on the rise since dropping below $30 in November last year and look to be pushing towards $60, which they broke above in 2021 and again in 2022. The price/earnings (PE) ratio is still very low at 6.15 but so is the yield at just under 0.8%. Ford shares have been moving sideways between $10 and $15 and seem to be settling at $11, where the PE is 12.8.

Source: interactive investor. Past performance is not a guide to future performance.

Hobson’s choice: GM looks seriously undervalued even after the recent share price rise, so although the yield is unattractive, the shares are a buy. The Ford chart shows a ceiling forming at a level that was a floor a couple of years ago and are unlikely to move higher. The yield just about makes this a hold. This is a reversal of my view in May, when I preferred Ford, but investors must take account of changes in companies’ fortunes.

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.

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