Automakers Running out of Gas - Page 2

August 23, 2006

Shares of Ford and GM have taken a beating over the past 3 years. After trading as high as $16.50 early in 2004, Ford shares are only worth $7.76 now. GM has fallen from $54 to $30 in the same period. GM repeatedly reported earnings losses in 2005, resulting in an ultimate loss of $18.71 per share during the year. In its last quarterly report, GM said that it lost almost $6 a share. These huge losses are concerning because if these trends continue, these companies will have no choice but to seek Chapter 11 bankruptcy protection.

GM is currently in talks with Carlos Ghosn, CEO of Nissan and Renault about a possible alliance. Ghosn is credited for turning around Nissan and Renault, and investors are hoping that the three companies together can stave off Asian competition. Pooling together the collective resources of the companies and moving forward seems like a good option for GM, which would gain many strategic advantages it lacks otherwise.

One benefit to shareholders is generous quarterly dividend payouts. Ford cut its dividend to 5 cents a share from 10, but the payment still yields 2.7% annually. GM also halved its dividend to 25 cents a share; now yielding 3.2%. The recent downturn in stock prices has cut Ford’s market cap down to $15 billion, while GM stands at $17 billion. This low valuation mars great potential if executives can engineer a turnaround. It isn’t hard to envision these stocks at double their current value if business improves.

Shares of Ford and GM have taken a beating over the past 3 years. After trading as high as $16.50 early in 2004, Ford shares are only worth $7.76 now. GM has fallen from $54 to $30 in the same period. GM repeatedly reported earnings losses in 2005, resulting in an ultimate loss of $18.71 per share during the year. In its last quarterly report, GM said that it lost almost $6 a share. These huge losses are concerning because if these trends continue, these companies will have no choice but to seek Chapter 11 bankruptcy protection.

GM is currently in talks with Carlos Ghosn, CEO of Nissan and Renault about a possible alliance. Ghosn is credited for turning around Nissan and Renault, and investors are hoping that the three companies together can stave off Asian competition. Pooling together the collective resources of the companies and moving forward seems like a good option for GM, which would gain many strategic advantages it lacks otherwise.

One benefit to shareholders is generous quarterly dividend payouts. Ford cut its dividend to 5 cents a share from 10, but the payment still yields 2.7% annually. GM also halved its dividend to 25 cents a share; now yielding 3.2%. The recent downturn in stock prices has cut Ford’s market cap down to $15 billion, while GM stands at $17 billion. This low valuation mars great potential if executives can engineer a turnaround. It isn’t hard to envision these stocks at double their current value if business improves.

On the other hand, Toyota has appreciated greatly amidst market share gains, giving it a hefty value of $179 billion today. Toyota announced that it intends to produce 9.06 million vehicles over the next year – while some analysts are predicting GM to make only 8.92 million. Toyota stock has performed nicely, but future gains will likely be limited. It is much easier for a $15-17 billion company to double in value than a giant like Toyota. Toyota remains a strong pick, reporting sales of $186 billion last year, and continues to make inroads in the market.

Honda has enjoyed similar success, resulting in a $61.5 billion valuation. Honda is trading at a slightly lower premium than Toyota at 11.5 compared with 14.1. The stock is up about 14% so far in 2006. Honda has gotten a good response from consumers for its hybrid gas-electric models. It now offers both its popular Accord and Civic models in a hybrid format.

Asian automakers have exerted significant out-performance over domestic automakers, and the foreign companies should continue these industry trends. However, it is important to realize that beaten up Ford and GM have the greatest potential to appreciate in value. Both companies will face challenges that Toyota and Honda don’t have to contend with, but if they manage to turn things around, shareholders will be rewarded considerably.



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At the time of publication, Dhinesh Ganapathiappan did not own or control shares of any companies mentioned in this article.