A Comparison of GM and Ford’s 1st Quarter 2010 Financial Results

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Tag: GM, Ford, first, 1st, quarter, financial results, comparison, market cap, value, bailout, bankruptcy, profit, cash flow, 2010

May 23, 2010

GM and Ford have recently posted their financial results for the first quarter of 2010.  Much has been made about whether post bankrupt GM will repay in full the US government who recapitalized the new entity.  Also, there has been much hype about Ford who avoided GM’s fate but did so with billions of dollars of debt on its books.  In the first quarter both companies were profitable and generated positive cash flow.  Knowing that one quarter does not make a for a trend, an assessment can be made of the future outlook of both companies.

Given the horrific economic problem in 2009, both company’s revenue improved significantly in the first quarter of 2010.  Both companies last year effectively shut down their plants especially in North America in the 1st Quarter of 2009 as demand fell sharply as a direct result of the banking collapse.  Comparing directly the total corporate revenue GM and Ford generated $31.4 and $31.5 billion in 2010 and up from $22.4 and $24.3 billion in 2009 (Figures 1 and 2).

Figure 1:  GM Financial Highlights (Click to enlarge)

 

Figure 2: Ford Financial Highlights (Click to enlarge)

To directly compare GM and Ford’s auto operations, because of the pending sale of Volvo $3.5 billion it generated should be subtracted.  In addition $2.5 billion in revenue from its financial services division should not be considered because GM no longer has a comparable entity.  Therefore, Ford’s ongoing auto operation produced $25.3 billion last quarter.  

Just looking at the historically troubled North American operations, GM and Ford made $19.2 and $14.1 billion on producing 668,000 and 574,000 vehicles in the quarter.  Normalizing the numbers for price per unit produced, GM generated just over $4,000 more per vehicle than Ford.  For the quarter, with only four brands GM’s market share was 18.4% compared to Fords at 16.6%.

Ford reported a total of $2 billion pre-tax profits with $1.2 billion generated by automotive division and $800 million from financial service.  It North American operations made $1.2 billion.  The company also reported having $25 billion in gross cash, however, that was offset by $34 billion in gross debt.

GM’s corporate earnings for the quarter totaled $1.8 billion and its North American operations contributed $1.2 billion.   GM Europe reported a loss of $500 million.  Gross debt at the end of the quarter stood at $14.2 billion.

Discussion

It is very encouraging that both GM and Ford have had profitable first quarters and able to generate positive cash flow, however, the fortunes of both companies are dependent of the state of the US economy.  The seasonally adjusted sales rate has stabilized and improving from the low in the winter of 2009 but still down sharply prior to the economic downturn (Figure 3).  However, there remains much uncertainty in the US economy as the debt crisis in Greece and the potential loss of confidence in the Euro could send the global economy into a double-dip recession.

 

Figure 3: Seasonally Adjusted Annual Sales Rate through April 2010 - Source Automotive News (Click to enlarge)

Ford is likely the company most susceptible to another economic contraction.  GM’s biggest advantage is that it went through bankruptcy to restructure its debt and today is relatively free from it compared to Ford.  GM had $14 billion of debt at the end of the first quarter but has since paid back much of it to the US and Canadian governments.  Ford on the other had has well over $30 billion of outstanding debt.  The reality of the situation is, Ford’s debt load is comparable to GM’s when it entered bankruptcy a year ago.  Ford survived the downturn and the Ford family still controls the company but the downsize is the the company is saddled with this debt that must be serviced.

The company has $25 billion in liquid cash and if there is another downturn, should be sufficient to maintain viability.  However, interest and the repayment schedule put it at a disadvantage to GM.  The company could convert the debt into equity but it already has 3.3 billion outstanding shares.  Moreover, when looking at Ford’s performance last quarter, $800 million of its pre-tax profits were coming from its financial services division which hides the automotive division true performance.  In the first quarter, GM’s core auto division was more profitable than Ford’s.

Looking into the near future, GM also appears to have a more robust pipeline of products in the work and can build upon its four remaining division in North America.  The Ford brand has solid product on the market and in the pipeline but is still struggling with its Mercury and Lincoln brands.  Post bankruptcy GM is benefiting from the product plans that were put in place a few years ago as it was betting a product driven renaissance would revive the company.

What is GM Worth?

GM, which is owned by the US and Canadian governments, the UAW healthcare trust and secured owners of Old GM’s debt, may go public sometime within the next year depending on market conditions.  By some estimates on the current value of Old GM bonds New GM could be worth between $64 and $90 billion.  Using Ford as a guide which has a market capitalization of $37 billion including $34 billion in debt , the estimates on mostly debt free GM’s are believed to be credible.  

To increase its credibility when it IPOs the company recently stated that it wants it own captured finance unit or may be considering purchasing control of it old GMAC unit which it sold to Cerberus in 2006.  GMAC which is now doing business as Ally also has the US government as its largest shareholder.

One of the key incentives for the company to have its own finance unit is to better control the terms of lending so it can regain access to the subprime lending market.  Currently only 1% of GM’s sales are to subprime buyers where subprime accounts for 20% of Honda’s sales. How GM will do this is questionable but if they can pull it off, GM’s auto sales could be 20% higher than today by having the ability to ease lending standards.  Moreover, GM’s current performance is shown to be more robust given they are out of a large market segment.  In addition, GM’s corporate earnings would go up with its own captured finance unit again and could add $500 million to a $1 billion to the bottom line.

Conclusion

In summary, Ford today is where GM expected to be if it not were for the financial calamity in 2008 and 2009.  The company is profitable but sitting on billions and billions of dollars of debt.  Baring another serious financial downturn, only time and/or shareholder dilution will fix its debt load.  But the company has secured the Ford family control over the company and that was the reason behind taking on the debt in 2006.  The company is also trading at a substantial premium and is benefiting from the post-crash rally regardless of its fundamentals (i.e. debt) and market conditions.

As far as New GM goes, all the restructuring of the old company in the years leading to bankruptcy appears to have super charged the company.  Again, assuming there are no significant shocks to the economic recovery in the US and the company continues to execute product consumer want, the future is looking very bright.  A large caveat is its performance in China where the company has had very impressive growth.  What happens if or when the the Chinese government pulls the stimulus that has been spurring the industry's impressive numbers.  

The only other caveat to the sustainability of both companies is their unfunded pension liabilities.  That is one liability both companies still must address.

References

GM wants more subprime buyers; will lender agree?, Detroit News, May 16 2010

GM: Lack of credit arm holds back U.S. car sales, Detroit News, May 17 2010

GM may be worth billion, CNN Money, May 19 2010

GM 1stQuarter 2010 Financial Results

Ford 1st Quarter Financial Results


 


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Comments
Mon May 24, 2010 10:33 am
Name: Ernie | Comment: Imagine Honda relying on more sub prime customers than does GM! Thanks for the interesting read.

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