Ford Uphill Battle: Can the Automaker Close the Performance Gap with GM?

Key Highlights:

The Tale of Two Auto Giants

The rivalry between Ford and General Motors (GM) has been a constant for decades. However, recent market performance has highlighted a growing disparity between these two American icons. As of mid-2024, Ford's stock has climbed a respectable 15% since the beginning of the year, but this pales in comparison to GM's impressive 36% surge. This stark contrast has left investors and analysts questioning: Can Ford close the gap, or is GM pulling away for good?

At first glance, the financial fundamentals of both companies appear similar. Both Ford and GM are profitable and experiencing growth, with Ford expected to generate profits of about $22 billion in 2024-2025, while GM is projected to reach $26 billion during the same period. Both automakers have also made significant inroads into the electric vehicle market, positioning themselves for future growth in this crucial sector.

However, a closer examination reveals two key differences that may explain the performance gap:

Profit Margins: GM currently boasts a net profit margin of 6.3%, nearly triple Ford's 2.21%. This substantial difference in profitability is a major factor in investor sentiment.

Capital Return Strategies: GM has announced an aggressive $16 billion share buyback program, equivalent to about 30% of its market value. In contrast, Ford has maintained its traditional dividend approach, offering a quarterly dividend of $0.15 per share and a special dividend of $0.18 per share announced in May. At current prices, this translates to a dividend yield of approximately 2.4%.

Ford Roadmap to Improvement

Under the leadership of CEO Jim Farley, who took the helm in October 2020, Ford is actively working to narrow these gaps. The company has outlined several initiatives aimed at boosting profitability and shareholder value:

If successful, these efforts could potentially increase Ford's operating profit by $1-2 billion, pushing net profit to around $11 billion in 2024, up from the previously expected $8 billion.

The broader U.S. auto market is expected to provide a boost to both Ford and GM. Industry projections suggest new car sales in the United States will grow to 16 million units in 2024, up from 15.5 million in 2023. By 2028, this figure could reach 17 to 18 million cars annually, offering significant growth potential for both automakers.

Analyst Perspectives: A Mixed Bag

Despite the clear performance gap, analysts are divided on Ford's prospects for narrowing the divide with GM. Here's a breakdown of some key analyst opinions:

Adam Jones, Morgan Stanley:

Mike Ward, Freedom Capital Markets:

John Murphy, Bank of America:

Despite these positive outlooks, the majority of analysts covering Ford (18 out of 24) maintain a hold recommendation. The average target price of $12.58 per share actually falls below the current stock price, indicating a degree of skepticism about Ford's near-term prospects.

Conclusion: A Long Road Ahead

While Ford has clearly lagged behind GM in recent stock performance, the company is not standing idle. With a focused strategy to improve profitability, enhance shareholder returns, and capitalize on the growing U.S. auto market, Ford has the potential to narrow the gap with its longtime rival.

However, investors should approach Ford stock with cautious optimism. The company faces significant challenges in improving its profit margins and convincing Wall Street that it can execute its turnaround plans effectively. While some analysts see substantial upside potential, the majority view suggests that Ford still has much to prove.

As the automotive industry continues to evolve, particularly with the shift towards electric vehicles, both Ford and GM will face ongoing challenges and opportunities. For investors, closely monitoring Ford's progress in implementing its improvement initiatives and its success in the EV market will be crucial in determining whether the company can indeed close the performance gap with GM in the coming years.

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