As of late, the debate for Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM) has centered around the potential for additional profitability in North America, as well as the opportunity to staunch losses in Europe given an improved view by some that the market is improving.
Although Ford is expected to benefit off the Europe rebound in the near term, Barclays PLC (ADR) (NYSE:BCS) prefers GM over the long term, maintaining a contrarian view vs. those who believe that Ford’s North American margins will run higher amidst improvements in the region.
The question that investors ask is which one is better–Ford or GM?
Near-term scenario
In the near term, the potential is there for both original equipment manufacturers (OEMs) to benefit from the Europe rebound, with Ford Motor Company (NYSE:F) likely to get the edge if pricing improves. Given renewed enthusiasm by some investors around the notion that structural problems in Europe have dissipated, there is increased likelihood that both Ford and GM will experience a bull trade.
The near-term production risk for the OEMs has declined, with risk shifting to the suppliers over the mid/long-term. Moreover, as OEMs begin to feel more comfortable with Europe (especially as the reduction in austerity programs help to lift sales in France, Italy, and Spain), it is less likely that the OEMs will aggressively discount models in Europe, which could potentially lead to 2Q and 3Q beats by Ford and General Motors Company (NYSE:GM) in Europe.
Second- and third-quarter beats by Ford Motor Company (NYSE:F) and GM in their European units could be near-term catalysts for the stocks. Moreover, the Europe trade could benefit Ford over GM for several reasons:
a.) Europe accounts for a larger portion of Ford revenue than GM (18% for Ford, 12% for GM)
b.) Ford posted a greater disappointment in Europe in 1Q than General Motors Company (NYSE:GM) (loss of $462 million for Ford, loss of only $175 million for GM), creating a better opportunity for rebound
c.) Finally, given Ford’s membership in the S&P 500, portfolio managers may want to own Ford for exposure to the strengthening U.S. consumer, especially if they see Europe risk as dissipated. However, this point might have become invalid after June 6, when GM rejoined S&P 500.
Long term – Is GM better than Ford?
However, as a Motley Fool blogger, it is the long-term scenario that matters more. Over the long term, there is a better opportunity for upside in GM’s stock than Ford Motor Company (NYSE:F). There are three reasons backing this opinion:
1. Yes, Ford remains the better company, but GM is improving much more quickly than people think. In particular, during recent meetings with management at GM, analysts at Barclays were struck by several developments, including the elevated visibility and influence of engineering within General Motors Company (NYSE:GM), progress on global platforms and modularity, and the increased understanding for the need of brand accountability. GM also appears to be making progress on improving operations and financial controls.
