How do you choose where you will put your money? Investing in auto manufacturers is a popular part of a well-hedged investment portfolio, but it can also be a challenge because so many things can impact the share prices of these companies. Before you open a position, do your research.
Pros & Cons of Investing in Auto Manufacturers
For instance, commodity prices can make a big difference in profitability. The costs of steel and aluminum are significant factors in maintaining strong profit margins. Foreign exchange rates come into play too – and that’s just the beginning.
Interest rates are a big concern because people are less likely to buy a new vehicle if borrowing costs are high. That risk could be mitigated if there are adequate tax breaks for consumers in place, but consumers are not the only people affected by higher interest rates. If interest rates go up, that is going to increase the cost of capital for the car maker and erode profit margins.
Unemployment rates also have an impact as well as labor relations. When a manufacturing plant strikes, it has a ripple effect through the company. Then, there is the nature of the car business to consider. It requires a lot of capital to build warehouses and keep factories running, to say nothing of the raw material costs that have to be floated.
In addition, the car manufacturer needs to accurately forecast trends and deliver vehicles that are what the people want. From towing capacity to technology features, it can make or break a model rollout. Plus, these automakers have to invest in developing the next big thing. From alternative fuel to driverless technologies, there is a big investment there too – and it’s one they might not see a return on if they made a wrong assumption.
On the plus side, most car makers offer a dividend to sweeten the deal – and they do tend to deliver, eventually.
Is GM Stock Worth Buying?
General Motors (NYSE: GM) has been on a road of recovery. It has been five years since its bonds became investment grade status and the company has been managing its cash well. It had to tighten its metaphorical belt, the efforts are paying off. At the end of 2017, GM had $5 billion in cash on its books as well as a revolving credit line of $1 billion. Its financial segment is doing well too.
One of General Motors biggest focuses going forward is Cruise Automation, its self-driving car segment. In June 2018, rumors began circulating that GM was considering some bold strategies for the division.
Bloomberg wrote, “The largest U.S. automaker is researching possibilities including a public offering of shares, listing a separate tracking stock to reflect its value, or spinning off the unit.”
While the company won’t be making a decision about a Cruise Automation IPO any time soon, it has been attracting significant capital. In May 2018, SoftBank Vision Fund announced that it put a valuation of $11.5 billion on the Cruise Automation segment and divulged plans to invest $2.25 billion in the venture.
According to the regulatory filing on the transaction, SoftBank’s investment starts the clock on a seven-year deadline. At that point, Cruise Automation will have to have been dissolved (be it through IPO or sale) or else the investment will convert to GM common stock.
It’s pretty big news given that GM only acquired Cruise in 2016 for less than $1 billion ($581 million price tag plus incentives to keep key staff), and that’s not all. In other exciting news, Cruise will offer its own Uber-like ride-hailing service in 2019.
Should You Buy Ford Stock?
Ford (NYSE: F) is also making some big changes. It is reducing the number of models it carries, for now. In 2007, Ford had a model line-up that included 27 different styles. By the end of 2019, it will release just 8. Of those models, only two are cars: the Mustang and a hatchback crossover called Focus Active – but all this is temporary.
Ford has been keeping its lineup narrow, so it can focus on the next big thing – alternative fuel. While the auto maker will have a sparse lineup for a couple of years, all that is slated to change in the next three years. The company expects to have 24 hybrids with plug-in capabilities and 16 electric cars by the end of 2022.
This auto company also has other technology ambitions, and they are rooted in the cloud. “Ford is working with Autonomic, a Silicon Valley-based company made up of a team of passionate technologists with broad experience in cloud and distributed systems, as well as mobile and machine learning, to build an open cloud-based platform — the Transportation Mobility Cloud,” explains Rich Strader, Vice President of Ford’s Mobility Product Solutions, and Sunny Madra, CEO of Autonomic.
“This platform can manage information flow and basic transactions between a variety of components in the transportation ecosystem — service providers, personal vehicles, bicycles, pedestrians, mass transit systems, and city infrastructure, including traffic lights and parking locations.” In other words, autonomous vehicles won’t have to sense a traffic light. It, along with its changes, would be synced with driverless cars.
“This is the first at-scale transportation solution that provides the ability to connect individual vehicles, third-party services, mobile applications, and transit systems, while also enabling sharing across the ecosystem,” continues Strader and Madra. “With Ford’s commitment to 100 percent connectivity, we aim to have the most vehicles connected to any platform by the end of 2019.” However, the pair were very clear that the Transportation Mobility Cloud is not limited to Ford.
Instead, the Transportation Mobility Cloud is going to give Ford a chance to be more than just an auto manufacturer. It would also become a data provider.
General Motors Vs Ford Stock Summary
Both General Motors and Ford have exciting opportunities on the horizon, it just depends on whether you think the price is right for your risk tolerance.
Ford is pursuing a bold strategy moving towards data, and there are no guarantees the company will be successful. It could end up like Amazon’s Web Services or it could turn out to be a bust. Another data provider could swoop in and take the market.
Having a big company like Ford behind the venture is no guarantee of success. In contrast, General Motors is using a more conservative strategy. The company is strengthening its bottom line while focusing on its Cruise Automation segment.
Right now, General Motors is trading at $32.33 with a 4.71% dividend yield. This puts the stock at 5.43 times its future earnings. In comparison, Ford is priced at $8.62 with a 6.97% dividend yield and a forward PE of 6.38. It pays a higher dividend but it is also priced higher relative to future earnings. Choose wisely.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.