Ford must close the gap with General Motors. We think Ford can do this by following GM’s lead on buybacks, also refining its lineup of electric and hybrid vehicles, and reining in warranty expenses. Shares of the Club Ford name have gained about 7% since the start of the year, far behind GM’s nearly 22% gain over the same period. The divergence in performance, while frustrating, can be attributed to a variety of factors, including different approaches to returning cash to shareholders. General Motors buys back a ton of stock; Ford, so far, not so much. “There’s no reason for GM to move forward and Ford to stay behind, other than some short-term negatives,” Jim Cramer said at the CNBC Investing Club monthly meeting in March. “The stock price is wrong…and it should go up. I wish they would do a big buyout like GM. That would be incredible.” F GM YTD mountain Ford vs. General Motors YTD Indeed, GM shares have soared about 50% since the November 29 announcement of an accelerated buyback program worth $10 billion. Ford only climbed nearly 26% over the same period – a respectable figure in its own right, but significantly behind GM. Before the buyout was disclosed late this year, Ford was down 10%, less than GM’s 14% decline. Although last year was great for the stock market as a whole, auto stocks were held back by United Auto Workers strikes that resulted in concessions to the union. Return on Capital Ford is no slouch when it comes to return on capital, with an annual dividend yield of 4.6% and a commitment to return 40-50% of free cash flow to shareholders. To increase its payout rate to 50% in 2023, the company chose in February to declare its second additional dividend in as many years. But, as we wrote at the time and as Jim’s recent remarks have reiterated, our preference would be for Ford to use excess cash in buybacks. In 2023, Ford spent $5.33 billion on dividends and stock repurchases, with only 6.3% on repurchases. GM was pretty much the opposite. Last year, the company spent $11.7 billion on dividends and share buybacks, with only a little more than 5% going to dividends. “The idea of returning capital to shareholders is an important theme emerging in the industry since GM announced the $10 billion buyback,” Adrian Yanoshik, an auto analyst at Redburn Atlantic, said in an interview with CNBC. The move has “put some pressure on some automotive OEM (original equipment manufacturer) management teams to find a thoughtful way to return money to shareholders.” Electric vehicles versus hybrids Another reason for GM’s recent outperformance is management’s expectation of an EBIT margin for electric vehicles of around 10% by 2025. Last year, Ford said that it planned to achieve an 8% EBIT margin for electric vehicles by 2026. this target. Both companies are losing money on their electric vehicle efforts. All that could change, however, as demand for electric vehicles slows and automakers rush to reduce sticker prices. Against this backdrop, Ford announced last week that it was delaying production of a new fully electric large SUV and pickup truck and that it was considering offering hybrid options across its entire North American lineup. by 2030. Ford’s shift toward hybrids was telegraphed ahead of the announcement, which added details. around strategy. Jim called the move to hybrids a smart move given the recent strength in sales of these part-electric, part-gas-powered vehicles. Following Ford’s April 4 announcement, Morgan Stanley auto analyst Adam Jonas raised his price target on the stock from $16 to $17 per share and maintained his buy-equivalent overweight. Jonas believes the slower adoption of electric vehicles is positive for Ford’s free cash flow outlook and capital return profile. In a note this week reiterating his overweight on GM, Jonas sounded a warning. He said: “GM has all but abandoned hybrids in its push toward purely BEV (battery electric vehicle) architectures…but may need to step up investment in hybrids from here.” » Jonas said he preferred Ford to GM. Warranty spending One of the headwinds for Ford has been increased warranty spending due to recalls and difficult new vehicle launches. During its third quarter, Ford recorded a $1.2 billion increase in costs associated with warranties – an unexpected headwind that caused the quarterly earnings shortfall. In its guidance alongside the fourth quarter figures, Ford said it expects warranty costs for the full year 2024 to be flat year over year. At the Bank of America auto conference last month, Ford Chief Financial Officer John Lawler said there were “a few inventory units” being built up to ensure the level of quality and standards at the end of the first quarter, which the company will report on April 24. “It’s a very short-term point, but it’s an industry where the very short term matters,” Redburn’s Yanoshik said. (Jim Cramer’s Charitable Trust is long F. See here for a complete list of stocks.) As a subscriber to CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after a trade alert is sent before buying or selling a stock in his charity’s portfolio. If Jim talked about a stock on CNBC TV, he waits 72 hours after the trade alert is issued before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, AS WELL AS OUR DISCLAIMER. NO OBLIGATION OR FIDUCIARY OBLIGATION EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO SPECIFIC RESULTS OR PROFITS ARE GUARANTEED.
General Motors’ world headquarters is at the Renaissance Center in Detroit.
Paul Hennessy | LightRocket | Getty Images
cnbc
