What’s The News?
News broke early Monday morning that the U.S. might end a 50-year tariff that analysts believe has created an unfair advantage for U.S. truck manufacturers.
The tariff requires a 25% fee paid by foreign manufacturers Nissan, Honda, and Toyota. However, this tariff is removed when trucks are manufactured on U.S. soil.
As a result, all three companies do have manufacturing plants in the U.S., but due to being Japanese companies, none are able to compete with either General Motors Company (NYSE:GM) or Ford Motor Company (NYSE:F) in the U.S in terms of quantity or scaled production. Thus, analysts believe this tariff gives General Motors Company (NYSE:GM) and Ford an unfair pricing advantage due to the lack of competition, and is why price increases for U.S. trucks have doubled the rate for cars since 2005.
What Does This Mean?
If this tariff is ended, some believe the truck market would become more competitive, and that both volume and sales per unit could decline for market leaders Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM).
On Monday, we could see the result of this fear. Ford Motor Company (NYSE:F)’s F-Series has broken records or created multi-year highs in just about every month this year and is the best selling pickup. Moreover, the F-Series has been largely responsible for Ford Motor Company (NYSE:F)’s double digit top-line growth.
General Motors Company (NYSE:GM) just recently launched its new Silverado, which has sold 284,666 models this year. While sales are strong, the Silverado significantly lags the F-Series’ 427,935 units in 2013. Therefore, Ford Motor Company (NYSE:F)’s excessive loss relative to General Motors Company (NYSE:GM) following this news is reasonable, as Ford has the most to lose.
Should You Buy?
Despite this news, I believe that any weakness in shares of either company should be viewed as a buying opportunity.
GM trades at just 0.33 times sales and 8 times next year’s earnings. Ford, with significantly greater growth, trades at 0.48 times sales and a forward P/E ratio under 10. Both trade greatly below the S&P 500 average, in a market-leading U.S. industry. Moreover, both stocks are trading near flat since January 2011, compared to a 36% gain from the S&P 500, which further shows the level of value and underperformance that exists in both stocks.
With that being said, and value being apparent, you might still be concerned with the possible implications of this tariff being eliminated. Because after all, we can’t deny that both GM and Ford have a lot to lose as industry leaders, and Ford has the most to lose.
However, according to a senior analyst, Alec Gutierrez, at Kelley Blue Book, an estimated 70% to 75% of pickup owners are brand-loyal. This means that the majority of buyers stick to their select model, and will not switch easily. Therefore, as long as GM and Ford continue to offer quality fuel-efficient and innovating products, the majority of their sales should stay intact – regardless of the tariff.
Final Thoughts
While I do think that any action with this tariff will be fundamentally minimal, and that either GM or Ford are great companies, I do believe that Ford is slightly better.
Ford is growing faster, its margins are higher, and it pays a dividend of 2.30%. Yes, Ford is slightly more expensive, but neither company is expensive relative to the overall market. Therefore, these minor advantages make Ford a much better investment, in my eyes, moving forward. Thus, I suggest you do your own due diligence following this stock price weakness.
The article Could This 50-Year Tariff Be Reason to Sell These Market Leaders? originally appeared on Fool.com and is written by Brian Nichols.
Brian Nichols owns shares of Ford. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Brian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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