On Wednesday evening, Freedom Capital Markets analyst Mike Ward initiated coverage of Ford and GM shares with Buy ratings. While these ratings may not be new, as Ward had previously rated both stocks as Buy while at Benchmark Research, they still reflect a positive outlook for the two automakers.
During late trading on Thursday, GM shares experienced a 1.2% increase, while Ford saw a rise of 2.1%. This positive momentum contrasted with the performance of Tesla, another U.S. car manufacturer, whose shares were heading in the opposite direction. In comparison, the broader market indices revealed mixed results, with the S&P 500 showing a 0.1% increase and the Nasdaq Composite displaying a 0.2% decline.
Ward anticipates continued growth in auto production as the industry recovers from the impact of the Covid-19 pandemic. In the case of Ford, the company’s financial position is strong, bolstered by a new labor contract and consistent solid free cash flow, even during challenging periods in recent years.
According to Ward, Ford is currently in a better position than ever before to benefit from an upcoming cyclical recovery.
The situation for GM is similar, with Ward asserting that the company’s past restructuring efforts have not received sufficient recognition. He explains, “Prior to the 2008 restructuring, GM’s breakeven level at the North American auto operations was estimated to be between 5 million and 5.5 million units to sustain operations. As of now, the breakeven level has significantly improved to approximately 2.5 million units.”
In conclusion, Ward’s bullish ratings for Ford and GM shares reflect his optimistic outlook on the companies’ prospects and their potential for success in the recovering auto industry.
GM’s Positive Free Cash Flow and Vehicle Sales
GM has consistently generated positive free cash flow every year since 2009, even amidst the restructuring efforts. In 2022, the company sold just under 3 million vehicles in North America, and in 2023, it sold 2.6 million vehicles in the U.S. (Final figures by region will be released shortly.) However, these numbers are significantly lower compared to the pre-financial crisis period in 2006 when GM sold almost 4.7 million vehicles in North America.
Price Targets for Ford and GM Stocks
According to Ward, an expert in the field, the price target for Ford stock is set at $20 per share, representing a potential increase of approximately 75% from its current levels. Similarly, his price target for GM stock is $60 per share, indicating a potential gain of 70%.
Despite these optimistic targets, it is important to note that they do not imply high valuation multiples. Ward believes that Ford and GM shares can trade at 8 to 10 times estimated earnings, while the S&P 500 typically trades at around 20 times earnings. This discount can be attributed to the capital-intensive, labor-intensive, cyclical, heavily regulated, and highly competitive nature of the auto industry.
Investing in Auto Shares
While these factors may discourage some investors from considering auto shares, Ward points out that the industry is currently experiencing an upturn in the cycle, with production on the rise. Therefore, this could be an advantageous time to invest.
Analyst Ratings and Price Targets
Currently, approximately 42% of analysts covering Ford stock rate it as a Buy. This figure is slightly below the average Buy-rating ratio of around 55% for stocks in the S&P 500. On the other hand, GM shares have a higher Buy-rating ratio of 67% on Wall Street.
The average analyst price target for Ford shares stands at nearly $13, while the average analyst price target for GM stock is approximately $46 per share.
Legacy Auto Makers Shine Despite Tesla’s Fourth-Quarter Earnings
Despite Tesla’s disappointing fourth-quarter earnings and conference call, the stock of legacy auto makers saw a rise. Tesla shares experienced a decline of 12.4% in late trading on Thursday. Elon Musk’s company reported earnings that were weaker than expected, and management expressed their anticipation of a substantial decrease in growth for 2024 compared to 2023. It is worth noting that Tesla witnessed an impressive 40% growth in new vehicle sales volumes throughout 2023.