General Motors Company (GM), Ford Motor Company (F): Unleashing Pent Up Demand

Like Ford Motor Company (NYSE:F), GM shares have had a decent run of late on strengthening fundamentals. That said, Ford’s 14% year over year sales growth in May handily outstripped GM’s meager 3% increase. General Motors Company (NYSE:GM)’s sales mix improved, with fewer low-margin fleet sales, which is a positive. Growth at the company’s Cadillac brand has also been very strong, which is a good sign.

Although Ford Motor Company (NYSE:F) is probably a better option, General Motors Company (NYSE:GM) still has room to run if sales keep up. Like Ford, however, investors need to watch carefully for an inflection point where rising rates make car purchases less desirable.

On the Home Front

New homes are another area that is getting a boost from the specter of higher rates. That’s been good news for builders who cater to the lower end of the market, like Lennar Corporation (NYSE:LEN) and D.R. Horton, Inc. (NYSE:DHI). However, this is also the segment of the market that is going to be hardest hit by affordability issues if rates rise.

D.R. Horton, Inc. (NYSE:DHI) saw its bottom line go from around $0.25 a share in 2011 to over $2 last year, while Lennar Corporation (NYSE:LEN)’s bottom line jumped from around $0.50 a share in 2011 to more than $3.00. Those are impressive earnings improvements and both companies have large backlogs to support the top and bottom lines. However, if sales dry up and buyers back out, their bottom lines could contract just as quickly as they ramped up.

Big Buys

Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM) both sell big-ticket items. While there is pent up demand, low rates are a clear support to sales. The same is true in the housing market, where sales are growing rapidly, too. If rates do rise, look for Lennar Corporation (NYSE:LEN) and D.R. Horton, Inc. (NYSE:DHI)’s less affluent customers to fall away quickly. Since higher rates could easily squash the momentum at all four of the companies above, these stocks need to be monitored closely right now.

The article Unleashing Pent Up Demand originally appeared on Fool.com and is written by Reuben Brewer.

Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Reuben 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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