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Some of the stupid excuses include:
- They are cyclical companies
- The Detroit 3 have lost 3.5 million in sales since 2000
- The world economy is shaky
- GM recently filed for bankruptcy
- Their markets have peaked
- They haven't changed their ways
They Are Cyclical Companies
Yes, they are cyclical. Every company is cyclical. Every industry is cyclical. Some more than others, but not every company is immune from swings in the market. Banks used to be 'non-cyclical' leader, not anymore.
Airline stocks are just as cyclical as auto stocks, yet they are trading at multiples greater than the auto industry. Why?
And what accounts for the irrational stock price for Tesla (TSLA)? At least Ford (F) and General Motors (GM) make money and have positive cash flows. In fact, both companies have a net positive cash position. They have more cash on hand than liabilities.
Auto sales in the United States hit a record 17.5 million vehicles in 2015. During the Great Recession, Ford (F) and General Motors (GM) cut their break even points to 10 million vehicles per year. Anything above an annual U.S. volume of 10 million vehicles is profit.
And what a profit they make. Sales of Ford's F-150 continues to be the best-selling vehicle in the United States for over 30 years.
Detroit 3 Have Lost 3.5 million in Sales Since 2000
Automotive News reports General Motors (GM), Ford (F) and Chrysler (FCA) have lost a combined 3.5 million vehicles sales since 2000. So how can they be making more money? Two big reasons – Fleet Sales and the UAW.
The Detroit 3 used to own car rental companies to keep their factories running. Ford owned Hertz (HTZ), General Motors owned all of National Car Rental and 29 percent of Avis, and Chrysler, the forerunner to Fiat Chrysler (FCA), used to own Thrifty Car Rental and Dollar Rent-A-Car.
The Detroit 3 owned these rental companies to have a place to sell their bad product and keep their factories running. These were low margin sales, and in many cases, were money losers for the Detroit 3. They no longer own auto rental companies.
The Detroit 3 needed to keep their factories running because of their labor contracts with the United Auto Workers (UAW). The contracts guaranteed nearly full pay and benefits to their hourly employees whether the factories were making cars or not. So if auto sales declined and the company had to close the factory and lay off workers, General Motors (GM), Ford (F) and Chrysler (FCA) still had to pay their employees even though they were not building cars.
To keep their employees working, the Detroit 3 bought rental car companies so they could sell their cars to them. Many Detroit automobiles such as the Ford Taurus, Chevy Impala, and Dodge Stratus had over 50 percent sales to daily rental companies according to Automotive News.
This strategy worked for a while, but it ended up destroying residual values for the Detroit 3 brands. Residual values are what the cars are worth after they have been on the market for a couple years. Japanese auto brands like Toyota (TM) and Honda (HMC) had much higher residual values on their cars in the past because most of their sales were to retail customers and not rental companies at discounted prices.
Ford (F) and General Motors (GM) no longer have to pay employees whether they work or not. The guaranteed employment clause in their UAW contracts were eliminated in 2009.
They are now able to focus on profitable sales to retail customers and rely less on fleet sales. Ford (F) and General Motors (GM) continue to sell cars and trucks to fleet customers, but they are much more profitable than they used to be.
This contributes to higher margins in their home market of the United States. Ford (F) and General Motors (GM) now also have residual values on par with their Japanese counterparts.
The World Economy Is Shaky
The stock market collapse so far this year is predicated on the Chinese market not growing as fast as it has before. China is not going into a recession, it just will not grow as fast as it used to.
So China is still growing. The United States along with the rest of North America is growing and doing well. Europe has started to grow, albeit at a slow rate. But Europe is growing nonetheless.
The world economy is not growing very fast, but overall, it is growing at a slow and steady pace. And this works out well for the automakers.
Adding capacity is incredibly expensive for automakers. Building a new assembly plant can easily cost over $1 billion. When the automotive market grows slowly, it allows the automakers to add incremental production to their existing base without the need for a large capital investment in new assembly plants.
Automakers can add production shifts to existing assembly plants to meet rising demand. If and when demand falls off, the added shifts can be eliminated without the need to close expensive assembly plants.
General Motors (GM) Filed For Bankruptcy
In 2009 General Motors (GM) went through bankruptcy. It shed billions of dollars in cost and was reorganized as a much leaner entity with a dramatically lower cost structure.
It went from 8 brands in the United States market to 4. General Motors now sells Chevrolet, Buick, GMC, and Cadillac cars and trucks to well defined market niches. It got rid of Pontiac, Hummer, Saab, and Saturn reducing overlap and having products fighting over the same customer.
The stigma of filing for bankruptcy should have little effect on market investors in the United States. All major U.S. airlines have gone through bankruptcy and are now doing very well and have stock prices to reflect that.
Their Markets Have Peaked
Another reason Wall Street investors shy away from General Motors (GM) and Ford (F) is because they believe the North American market has peaked.
That argument has been made for each of the last three years, yet the market keeps growing. Sure the market will drop at some point.
The average age of automobiles in the United States is over 11 years according to R.L. Polk.
Since the Great Recession, the average age of automobiles in the United States has actually gone up rather than gone down. This means the cars and trucks on the road today are older and will need to be replaced. This bodes well for Ford (F) and General Motors (GM).
Have They Really Changed?
Ford (F) and General Motors (GM) used to destroy capital better than anyone else. They could waste billions of dollars on stupid business decisions with no discipline whatsoever.
How times have changed. Recently Ford (F) announced it was pulling out of Japan and Indonesia and will no longer sell cars and trucks there. Last year, General Motors (GM) closed its operations in Russia. GM will no longer manufacture and sell automobiles in that country.
Ford and GM have also decided to stop manufacturing cars in Australia due to currency fluctuations there.
They both have competitive labor agreements with the United Auto Workers (UAW). They have right sized their production capacity to match demand around the world. And they no longer own rental companies that lead to a destruction of residual values for their products.
Yes, Ford (F) and General Motors (GM) have changed.
Buy General Motors (GM) and Ford (F)
Now it is time to own stock in Ford (F) or General Motors (GM). Ford (F) has an annual dividend of $0.60 per share which returns an annual yield of 5.01 percent as of this writing. General Motors (GM) has an annual dividend of $1.44 per share with a yield of 4.93 percent.
Buy the stocks and hold them. These are long term investment companies. When their stock prices eventually rise, that will be the icing on the cake.
Disclosure: I own stock in Ford Motor Company (F) and own a GM vehicle and a Ford vehicle.