When MarketWatch announced that Ford (NYSE:F) CEO Alan Mulally was its 2010 CEO of the Year over candidates Steve Jobs of Apple (Nasdaq:AAPL) and Jeff Bezos of Amazon.com (Nasdaq:AMZN), most investors accepted the proclamation given Ford's rebirth under Mulally. Frankly, the CEO's decision to raise as much financing as possible back in 2006 when he joined the floundering car maker is part of automotive lore already. But we're not talking about leadership here - Investopedia readers are interested in the investment angle. When it comes to deciding whether Ford or General Motors (NYSE:GM) is the better bet right now, there are three reasons why the government-backed GM is the better bet. (For more on the history of Ford, read Henry Ford: Industry Mogul And Industrial Innovator.)
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CEO Stock Purchases
Gone are the days when CEO's actually paid the going rate for company stock. In 2010, the average CEO of an S&P 500 company received about $11.4 million in total compensation with 55% generated through stock and option awards. There's no need for executives to reach into their pocket when shareholders are so generous. Therefore, it's quite revealing that Daniel Akerson, CEO of General Motors bought 30,000 shares of his company stock May 11 on the open market for $31.33 a share, a personal investment of almost $1 million.
Cynics on Yahoo Finance message boards were having a field day when the purchases hit the news, suggesting Akerson could easily afford to do so considering his annual compensation. This might be true; but ask yourself how many shares Alan Mulally has bought on the open market since taking the reins in 2006. The answer is none. All of the shares acquired are "Code A" transactions; what the SEC refers to as grants or awards pursuant to Rule 16b-3(d), meaning they are shares acquired at a cost less than the going rate or none at all. According to InsiderScore.com, no Ford insider has bought its stock in the past 24 months, including Mulally. Akerson appears to be putting his money where is mouth is. Mulally is simply benefiting from an excessive signing bonus provided by Ford's board back in 2006, when the former Boeing (NYSE:BA) executive received $28 million for four months work. In hindsight, it was probably money well spent. Nonetheless, Ford shareholders should be concerned that he's not willing to buy on the open market. Advantage: GM. (To learn more, read A Guide To CEO Compensation)
According to automotive experts, General Motors decision to scale back customer incentives in March and April would mean market share losses in the United States. It appears they were wrong. In April, GM increased its year-to-date market-share advantage over Ford by 140 basis points. GM's YTD market share is 19.6% versus 16.2% at Ford. Even more interesting is the fact that while GM picked up 90 basis points market share in April, Ford lost 50 basis points.
A key reason for GM's success despite lowering incentives by more than 10% is the Chevrolet Cruze - it has sold more than 600,000 vehicles worldwide since its launch in October 2010. The Cruze, along with five other vehicles, were among April's 20-bestselling vehicles in America. Ford had just four. Granted its F-150 was at the top of list with 45,432 vehicles sold in the month, 50% higher than the Toyota Motor Corporation (NYSE:TM) Camry. Clearly, the battle for automotive supremacy in the U.S. is heating up with gas prices providing an interesting wildcard. (When looking at the automotive industry we need to consider Which Is Better: Dominance Or Innovation?)
Before examining valuation, let's recap the first quarter for both companies. Revenues were relatively the same with $36.2 billion for GM and $33.1 billion at Ford. GM's revenues increased by 14.9% year-over-year, 1020 basis points better than Ford. In terms of operating income excluding goodwill impairment, GM's increased by 12.7% to $1.34 billion while Ford's was up an impressive 47.6% to $2.48 billion. Ford's operating margin of 7.7% was double GM's. At least in terms of earnings, Ford is clearly outperforming GM. Based on what we know from the first quarter, it's logical that Ford's earnings multiple is going to be higher than General Motors. The question isn't whether it deserves a higher multiple - Ford's trailing 12-month P/E is 9.1 versus 7.4 for GM - but whether this spread will continue in future quarters.
Although GM still has the government as a partner, it's expected that will end sometime in the second half of 2011, when the Federal government does a secondary offering to sell its remaining 500 million shares in the company. Many expect that this will further depress its stock below $31 where it sits currently. That would only make GM more enticing. While Ford is currently more profitable, it isn't gaining market share as many had anticipated it would. GM is getting stronger each quarter and now outsells Ford in both China and Brazil by a rate of three to one. It's conceivable that GM will match or surpass Ford's operating margin by the end of 2011. Add to this the fact that GM's net debt surplus is $17.1 billion compared to an $83.7 billion deficit for Ford and you realize that Mulally's bold move has actually put it in a worse position relatively speaking, and this isn't reflected in either stock price. (For more on Analysis, check out Fundamental Analysis For Traders)
By the time the Federal government sells its stake in GM, the cost to taxpayers will be negligible at best or approximately $11 billion at worst. It's not much to pay when you consider what was at stake back in 2008. GM has emerged from bankruptcy lean and ready to do battle with the likes of Ford and others. The fact that Daniel Akerson has chosen to buy the stock on the open market for $31.33 a share tells me something about where the bottom is for GM shares. The same can't be said for Ford. (For an overview on where GM has risen from, read An Overview Of Corporate Bankruptcy.)
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