Analysts Believe Ford And GM Stocks Are Extraordinarily Undervalued

The auto sector is a good bargain for value investors like Ed Wachenheim III.

‍

As well as buying millions of more General Motors shares GM +1.85% (ticker: GM) during the first quarter, Wachenheim's Greenhaven Associates initiated a substantial position in Ford F +1.71% Motor (F) as well. Additionally, Greenhaven RESA +1.51% (LEA) increased its stake in the automobile-seat manufacturer Lear RESA +1.51% (LEA) during that period by a significant amount. Securities and Exchange Commission documents revealed the trades by Greenhaven.

‍

As a result of the Greenhaven purchase, its stake in GM has risen to 20.3 million shares as of March 31, up from 4.9 million shares at the end of 2013. As part of its first-quarter investment strategy, the investment firm also purchased 5.6 million shares of Ford; it did not own any Ford stocks at the end of 2022. There has been a 700,000 share increase in Greenhaven's stake in Lear, reaching 1.7 million shares.

‍

GM, Ford, and Lear all declined more than 40% in 2022, with Ford falling more than 40% and Lear falling more than 32%, compared to a 19% decline for the S&P 500 index SPX –0.19%. According to Wachenheim, the shares of GM, Ford, and Lear have gained 2.8%, 6.0%, and 6.2% this year, while the index has gained 6.9%.

‍

In response to a question regarding Greenhaven's recent shares trades, he wrote: "We are value investors with a time horizon of several years. Ford and GM seem extremely undervalued."

‍

With Wachenheim's three-decade track record, Greenhaven portfolios have on average delivered an annual return of 19% to Wachenheim investors, before fees over the past three decades.

‍

As he wrote, he did not pay much attention to the expansion of these companies into electric vehicles; instead, he focused on the high margins of their pickup trucks, SUVs, and vans. In a few years, we estimate that the earnings power of GM (earnings in a normal year) will be about $8.00 [per share] and that Ford's earnings will be about $2.50.

‍

Our opinion is that both companies are worth at least 10 times their earnings because of the attractiveness of pickup trucks, SUVs, and vans. If Cruise succeeds, GM could be worth considerably more than 10 times its earnings. Furthermore, both companies appear well-managed and have more cash than debt.

‍

GM's Cruise division is dedicated to self-driving vehicles. According to GM's price/earnings ratio, the stock is worth less than six times its earnings. S&P Capital IQ estimates Ford will lose money in 2022, but it's trading at a discount to its expected earnings for 2023.

‍

GM and Ford's shares stack up well against Lear stock, Wachenheim says.

‍

“The company says that despite the fact that OEM sales are generally a bad business, seats are a perfectly good business and Lear is doing well at it, as well as gaining market share from Adient ADNT +0.82% (ADNT) (and maybe other companies, too)," Wachenheim writes.

‍

“As for Lear's balance sheet and management, both of these are important to us. The auto market remains depressed worldwide,” he wrote, “we expect the normal demand for new automobiles to increase in the next few years to about 97 million versus 80 million-81 million in the past year.”

‍

Lear's margins should approach normal when auto sales return to normal, which appears to be around 8%. If margins remain at 8%, Lear should earn $22-$23 per share two or three years from now. Wachenheim added that the shares should be valued at a minimum of 10 times earnings. Therefore, at their recent price, they seem to be very attractive.

‍

The stock would then trade at $220 to $230 a share, about double Thursday's closing price of $131.70.

‍