The erstwhile barometer of the American economy is a changed beast from the old monolith. But Ford still gets my money.
Message Posted: Nov 26, 2010 1:29:11 PM
More By Martin T. Sosnoff
As befits a wounded beast, the General Motors prospectus covered 517 pages of lawyerese. This was not exactly like the U.S. taking Comsat public in the early sixties. The satellite communications operator commanded a broader distribution than G.M. Every grandmother in the country who put in to buy 10 shares for each of her grandchildren got her stock circled.
The U.S. Treasury obviously didn’t deem GM suitable for grandchildren. Grandmothers must buy in the aftermarket. Tim Geithner squeezed every last dime out of the underwriting headed by Morgan Stanley ( MS - news - people ), allowing no free rides. GM at $33 came at a full price rather then the initial indication of $26-$29.
Comsat, incidentally, with a lock on satellite communications, blew its primacy, diversified foolishly and was never heard from again. Grandmothers in the fifties and sixties then concentrated their buying on American Telephone. It sported long lines dominance here and abroad at excessive tariffs.
The Justice Department later forced Ma Bell to spin off its regional operators. This was comparable with the breakup of Standard Oil of New Jersey decades before. Both companies never again became serious contenders. ExxonMobil ( XOM - news - people ) is the relic of John D. Rockefeller’s empire. MCI, backed by Mike Milken’s financing muscle, battled Telephone from strangulation in its crib. T litigated MCI at every turn, but couldn’t litigate it to death.
In the early fifties, GM controlled the lion’s share of the auto market. This was before Honda ( HMC - news - people ) and Toyota ( TM - news - people ) landed on our shores. GM’s swaggering headman, Chuck Wilson, clothed in a double breasted sharkskin suit tight around the hips, once quipped: “What’s good for General Motors is good for the country.” Corporate headmen no longer dare talk that way, at least publicly. In 1952 I was a 21-year old second louie stationed in Fort Benning, Ga., going through a 4-month course in company officer’s training and then you shipped out for Korea toute de suite. West Pointers in my class drove 1952 two-toned Chevy sedans. I bought a tan Ford for $2,000, then missed my monthly installments on the car loan while fighting in Korea. The finance company couldn’t find me or my car stored in Stockton, California. I caught up with payments late in 1954.
Henry Ford’s son ran the Ford Motor Company ( F - news - people ) so-so in the fifties. Ford later was brought public by Sidney Weinberg of Goldman Sachs ( GS - news - people ), their banker. Currently, Ford is a better run operation than General Motors. Spiffy new car models, a stronger balance sheet, higher profit margins and less of a pension and healthcare burden going forward. Ford’s debt should be upgraded soon to investment grade, long before GM.
Both Ford’s and GM’s European business is lackluster, but GM has a foothold in China through joint ventures there. The car market in China is already 50 percent larger than ours, less cyclical and more growable. Its middle class mushrooms as workers leave the farms and flock to cities. China’s unemployment rate holds steadily at 4 percent, a level we haven’t seen here since the early nineties when Clinton was president and the budget deficit was pared down.
Some analysts believe our auto industry has bottomed out. The recession took new car sales down from 15 million units to below 10 million, which is when GM’s overhead did it in. Their financing subsidiary, GMAC ( GJM - news - people ), was an active player in the home mortgage debacle, and was later acquired by the private equity house Cerberus which suffers a huge loss on its investment.
Ford’s management was farsighted, raising enormous gobs of liquidity pre-financial crash and they managed through the recession. True, Ford touched down at a buck, and its debentures sold way below par. Currently in the mid-teens, it discounts a 12.5 million car year in 2011. Earnings then should reach $2 a share. Because both Ford and GM sport a top heavy debt structure, and pay little in taxes, analysts use the yardstick enterprise value to EBITDA. Ford sells at approximately 4.5 times next year’s enterprise value on my modeling, GM somewhat less.
Neither stock discounts what analysts label a normalized car year, 15 million to 16 million units. Ford could earn $3 a share then. My model on GM is still a work in progress. Analytical backup for a 16 million car year covers several reference points. One is miles driven in the country, now going up. The average age of the car population is higher then 5 years ago for obvious reasons-too much unemployment and now consumer debt reduction. Scrappage rates are on the low side, I’m skeptical of a 15 million car year in an environment of 9 percent or more unemployment, a flattish real wage level and GDP limping along at 2 percent.