Car Wars: Why GM's a Better Buy Than Ford

Why you should invest in General Motors
Why you should invest in General Motors

It's a fair question: "Is Ford better than GM?"

In the view of my Motley Fool colleague Rick Munarriz, Ford (F), with its solid line of hit products and bailout-free balance sheet, is the fiscally responsible choice. He argued that investors should pass on the company known until recently as "Government Motors."

With all due respect, I have to disagree: I think General Motors (GM) is a buy. In fact, right now, given that it's trading in the low $20 range, I think it might even be a steal.

There's Nothing Wrong with Ford...

Don't get me wrong: I'm a fan of Ford, both the company and its stock. I was rooting for (and investing in) the Blue Oval back in the dark days of early 2009, when much of the market had given it up for dead.

Ford's product renaissance is the reason I bought the stock in the first place back in March 2009. And I recently made another investment in Ford's products -- my wife and I just bought a new 2012 Ford Focus. It's an impressive vehicle: tight, responsive, impeccably finished, miles ahead of the new Honda (HMC) Civic in so many ways. It's exactly the kind of car Detroit couldn't seem to build in the old days -- firsthand evidence that Ford really has changed in fundamental ways.

I'm still a Ford shareholder, still extremely impressed by the way the company continues to execute in markets all over the world, and I have no plans to sell. It's a great turnaround story, and on a purely personal level, it's a story that has added a lot of money to my IRA in the last two and a half years.

But here's the thing: Ford's not the only remarkable turnaround story in Detroit. And right now, the other one might represent an even better value.

...and Yes, GM's History Is Pretty Ugly...

Yes, I know General Motors got crossed off of many Americans' holiday card lists after the rule-bending quickie-bailout-bankruptcy that the Obama administration engineered for the company. I also know that even before the company's collapse and rebirth in 2009, GM's corner-cutting approach to product development had alienated thousands and thousands of consumers. (There's a 2006 Cadillac in my garage -- believe me, I know.)

GM was for years (heck, decades) the poster child for everything that was wrong with Detroit. Shoddy products sold with huge margin-crushing incentives (those "cash back" or "zero percent financing" deals), overpaid workers who somehow got paid even when they were laid off, management that had its collective head firmly stuck in the sand and seemed certain that it was just a matter of time before GM's market share returned to levels not seen since the Nixon administration... GM had it all. Or so went the public perception.

Sadly, in some ways, the reality was even worse. But here's the thing: GM has changed.

...but This Isn't Your Father's (or 2008's) General Motors

The management team brought on after the bankruptcy, led by CEO Dan Akerson, has set very lofty goals -- and so far, the company is executing.

Akerson had a few stumbles early on, but recently, his plan to transform GM looks like it's gathering steam. And while GM's product line still has some big holes that need to be filled before it's the equal of Ford's or Toyota's (TM), the General's most recent products -- the Chevy Cruze, the Buick Regal -- are great vehicles that rank with the best in their classes.

The stock market hasn't quite caught on to this yet, for a few reasons.

  • First, that bad rep from the old days still hangs over the company -- lots of investors don't even bother taking a closer look.

  • Second, and more to the point, GM still has some work to do on the product front. GM cut its product-development efforts to the bone in the face of huge losses leading up to the economic crisis, just as Ford was mortgaging everything it could to fund an all-out product blitz.

The New GM Is Coming Soon

Now, here in 2011, Ford dealers are wall-to-wall with great vehicles, while GM's are hit or miss. It'll probably be three more years before GM's products and "cadence" (the speed with which old models are replaced with new ones) catch up to Ford's.

Here's why that's significant: Better products are more profitable. A company with class-leading products doesn't have to resort to incentives to keep sales up. That means bigger margins and more profits -- and more money to spend on the next generation of products, ensuring that they're competitive as well.

For the most part, Ford's already there. GM's still playing catch-up. And that's why there is opportunity for investors in GM.

A Bargain, with Some Caveats

There are some other issues weighing on the stock price. GM's pensions are underfunded, and the company could -- emphasis on could -- face a significant liability in a couple of years. But management has signaled it they will act aggressively to "de-risk" (its term) in the near future, and the company's huge cash surplus (over $30 billion) should be more than ample to meet obligations.

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And, of course, there's the whole "Government Motors" problem: The U.S. still owns 27% of GM, and the Canadian government owns another 12%, the lingering legacy of the company's bailout. While the stigma of government ownership might deter some investors, the real issue is that sooner or later, all of that stock is going to hit the market. The resulting dilution could drive GM's stock price down significantly, or so the argument goes.

These are all valid points. But here's why I bought GM stock: It's selling at less than five times earnings -- that's half of the industry's historical average. Ford's valuation is only slightly higher -- but GM's turnaround still has more room to run.

Assuming the economy cooperates, GM's earnings could very well continue to grow as the company fills those showroom gaps with fresh, competitive products. And that, in turn, could well give GM's stock more upside over the next few years.

At the time of publication, Motley Fool contributor John Rosevear owned shares of GM and Ford. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of Ford and General Motors.

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