GM vs. Ford: One Offers Value and Growth

BOSTON ( TheStreet) -- Prospects for GM ( GM) and Ford ( F) are improving on an almost daily basis. Just yesterday, Ford Chief Executive Officer Alan Mulally made the bold prediction that sales will rise 50% in four years as Africa and Asia demand strenghtens. Ford, which sold 5.3 million vehicles in fiscal 2010, will shoot for "nearly 8 million" by 2015. Is that reasonable?

GM

While Ford's China sales jumped 15% in May, GM has a stronger foothold in the region, recently debuting a China-exclusive brand, Baojun. Although both GM's and Ford's shares are attractive, GM is looking cheaper in light of the recent sell-off in equities. As QE2, the Fed's record bond-buying program, ends, many investors are predicting a down-leg in stocks. If that projection proves prescient, GM's stock deserves consideration from long-term investors. Although down 22% this year, GM's outstanding assets and growth prospects are undervalued by the market.

After its $33 IPO, GM rallied to as high as $39.48. It's now 28% lower than the 52-week high, presenting an opportunity to value investors. At an enterprise-value-to-EBITDA ratio of 3.2, a book-value multiple of 1.6 and a free-cash-flow multiple of 7.7, GM sells at respective peer discounts of 61%, 38% and 62%. The bargain has attracted sell-side fans, though many received fees for the initial offering, presenting a possible bias. Currently, 14, or 74%, of the equity researchers evaluating GM rate its stock "buy" or "overweight" and the remaining five rank it "hold."

With a median target of $42.67, GM may offer a 50% return, based on the consensus opinion. Other analysts see even greater upside. The unwinding of QE2 and recent poor economic data have hurt the sentiment for GM as automakers are abnormally sensitive to the business cycle and consumer spending. Consumer confidence hit a three-month low last week and, just yesterday, GM CEO Dan Akerson noted that "there's some question about how strong the recovery will be." He cited higher oil prices and stubbornly high unemployment as headwinds.

Many investors are citing a pending sale by the U.S. government, which still owns almost 23% of GM, as a reason to delay a purchase of the stock. But, the pending sale should be already priced in and, further, the pace of such a sale may be more gradual than once thought. Also, there are now rumors circulating that GM is in talks to buy out the government's stake, perhaps by issuing debt. Such a move, though costly, would alleviate shareholder dilution.

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