GM & Ford Battle COVID-19: Who Will Win?

Ford stock (NYSE:F) has declined by close to 46% since early February after the WHO declared the Coronavirus a global health emergency, while General Motors stock (NYSE:GM) has fared slightly better and lost only 36% of its value. The spread of the pandemic across the world has meant that people really don’t need to drive much right now, and not many are buying new cars either. Production has also come to a standstill across automotive plants across the world. Discretionary spending is likely to drop as the economy slips into a recession, impacting revenues for both companies. However, we believe that General Motors could fare better than Ford through the current downturn, given its relatively lower debt load, its focus on SUVs and trucks, and its stronger operating performance in recent years.

Our conclusion is based on our detailed dashboard analysis, ‘Is Ford Motor Expensive Or Cheap After A -45.9% Move vs. General Motors?’ wherein we compare trends in key metrics for the two automotive companies over the years to determine their relative valuations under the current circumstances. We summarize parts of this analysis below.

Why Has GM Outperformed Ford Over Recent Weeks?

GM’s stock has declined by 36% since early February, compared to 46% for Ford. The steeper decline in Ford’s stock price can be attributed to its higher leverage, as well as the fact that the company recently suspended its dividend and raised junk bonds to the tune of $8 billion at an interest rate of ~9%, to bolster its liquidity. GM, on the other hand, has maintained its dividend, although it’s possible that it could be suspended at any time. GM’s total cash position is also slightly better at about $19 billion versus $17 billion for Ford.

GM has also been doing better on the operational front over the last few years, improving its operating margins to about 4% as of 2019, driven by better cost management and a focus on SUVs and trucks. On the other hand, Ford has seen its operating margins decline to about 0.5%, and its strategy of pivoting from sedans in favor of crossovers, SUVs, and trucks has not entirely gone according to plan, as it faced lackluster sales of its redesigned version of its popular Ford Explorer, amid quality and production issues. This might give investors confidence that GM  could fare better vs. Ford as the market recovers.

But How Long Will Automotive Stocks Remain Under Pressure?

• The expected timeline for recovery in global economic conditions, and in General Motors and Ford stock, hinge on the broader containment of the coronavirus spread. Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.
• We do believe these trends are likely to reverse in later quarters of 2020, and as the Coronavirus crisis is tamed during late Q2, higher revenue and earnings expectations will replace the scenarios that are easily imagined during difficult times.
• Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete picture of how the Coronavirus related stock market crash compares with previous crashes. The complete set of coronavirus impact and timing analyses is available here.

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