The end of 2024 marks renewed uncertainty for the auto industry. Third-quarter new vehicle sales dropped, marking the second consecutive quarterly decline. Production estimates fell accordingly and automakers are responding by cautiously managing inventories.
As the industry braces for 2025, affordability continues to dominate. Proposed tariffs could escalate pricing pressure, while the expiration of federal electric vehicle (EV) tax credits threatens to dampen demand further. Yet, easing interest rates might offer a glimmer of hope, particularly for premium vehicle sales.
Amid this volatility, Detroit’s heavyweights - Ford (F) and General Motors (GM) - are uniquely positioned to weather the storm. Both have embraced strategic production adjustments and innovation, setting them up for future resilience.
Yet, Wall Street painted contrasting pictures for these rivals. Brokerage firm Jefferies delivered fresh ratings on the stocks, sparking a surge in GM’s stock while Ford’s took an unexpected tumble. Let's dive deeper to find out which of these two names deserves a spot in investors' portfolios for 2025.
The Case for Ford Stock
Michigan-based Ford Motor Company (F), incorporated in 1903, shaped modern mobility with its trucks, SUVs, and Lincoln luxury vehicles. A pioneer in pickup trucks and commercial fleets, Ford’s $39.3 billion market cap reflects its global footprint. As the auto world electrifies, Ford charges forward, balancing cost-cutting with innovation in EVs and automation. Yet, higher interest rates, coupled with inventory challenges, uncertainty surrounding its European strategy, and a widening gap between warranty provisions and cash flows, have fueled investor unease.
Despite Ford's efforts to innovate, its stock performance tells a different story. Over the past decade, shares of the automaker have plummeted 36%, with a sharper 52% drop in just three years. This past year alone, Ford fell 19%, underperforming the Nasdaq Global Auto Index Fund's (CARZ) 4% gains. Hovering near August lows of $9.49, Ford faces the challenge of reigniting investor confidence.
When the pandemic hit, Ford slammed the brakes on its dividend payouts, suspending them in 2020. But the Detroit giant was not down for long. By October 2021, Ford revived its dividend with a modest 10-cents-per-share payment. Since then, the company has been on the up-and-up, gradually bumping up payouts. Fast forward to Q4 2023, when management announced a more generous 15-cent quarterly dividend.
On Dec. 2, Ford delivered on that promise, paying 15 cents per share. With an annual dividend of $0.78 and a healthy yield of 6%, Ford’s payout ratio of 35% signals that its dividend is well-covered by adjusted earnings - giving investors something to feel good about amid the challenges.
Priced at 5.5x forward adjusted earnings and 0.22x sales, Ford's current valuation reflects a significant discount to its industry peers and its own five-year averages.
Ford Dips Despite Beating Q3 Expectations
Ford’s Q3 earnings report on Oct. 28 initially painted a picture of strong performance, yet the stock took a nearly 9% dive in the subsequent session. The automaker posted an adjusted profit of $0.49 per share, up 25.6% year-over-year, with revenue hitting $46.2 billion, a 5.5% annual increase. Adjusted free cash flow also showed improvement, more than doubling annually to $3.2 billion in Q3. Additionally, Ford Blue, the company’s main division selling trucks, reported a 3% sales increase, while Ford Pro, catering to commercial and government clients, saw a 13% sales spike.
On the downside, the company faced significant hurdles. Ford’s net income, after accounting for a $1 billion charge-off related to its loss-making Model e EV division, fell to $0.22 per share, down 27% and less than half its adjusted EPS. Additionally, the company’s Model e segment, focused on EVs, saw a staggering 33% revenue drop, with wholesale volumes falling 11%. The company incurred a loss before interest and taxes of $1.22 billion. The company’s EV strategy faces challenges from both intense competition and high costs for next-generation vehicle development. Ford’s EV losses, totaling $4.7 billion, are expected to widen to $5 billion this year.
On top of this, warranty expenses linked to quality issues have added pressure. The company anticipates up to 18 months before these costs are substantially reduced. Inflation, particularly affecting the joint venture in Turkey and material costs for the Transit van in Europe, will likely further strain margins.
While the company boasts a solid cash position of $28 billion, management has ruled out a major buyback, preferring to hold cash in the face of global uncertainties. Furthermore, the Ford family’s significant voting power in the company suggests that dividends, not buybacks, remain a priority.
The company also warned that inflation and warranty expenses have limited its ability to achieve record financial performance this year. Ford anticipates an adjusted EBIT of about $10 billion for the full year and an adjusted FCF between $7.5 billion and $8.5 billion. Ford also expects a $5 billion loss from its Model e division, a $9 billion EBIT from Ford Pro, and $1.6 billion in earnings from Ford Credit.
Analysts tracking Ford anticipate the company's adjusted profit to be $1.80 per share for the current fiscal year, and dip 5% to $1.71 per share in fiscal 2025.
Jefferies analyst Philippe Houchois downgraded Ford from "Hold" to "Underperform," slashing its price target by 25% to $9, citing endemic challenges rather than systemic ones. The firm raised concerns about inventory issues, strategic decisions regarding Ford's European presence, and a growing $8.5 billion gap between warranty provisions and cash flows. With these hurdles, including potential restructuring and warranty claims, Jefferies anticipates a tough start to 2025 for Ford, leaving little cash for shareholders while trying to navigate its electrification strategy.
The average analyst recommendation for Ford stock now is a “Hold.” Of the 20 analysts covering the stock, five rate the stock as a "Strong Buy," 10 suggest a “Hold,” one advises a "Moderate Sell," and four say it’s a "Strong Sell."
Ford's average analyst price target of $11.67 indicates potential upside of 18% over the next year. The Street-high price target of $19 suggests the stock could rally as much as 92% from current levels.
The Case for General Motor Stock
Founded in 1908, Detroit-based General Motors Company (GM) designs, builds, and sells trucks, crossovers, cars, and automobile parts and provides software-enabled services and subscriptions worldwide.
Once the dominant force in the U.S. auto industry, this automaker endured a major setback with its bankruptcy during the financial crisis, only to rise from the ashes. Now, it is charging ahead into the electric era, with plans to roll out an impressive lineup of EVs like the GMC Hummer e-pickup, Cadillac LYRIQ, and Chevy Silverado EV. Powered by its Ultium Drive platform, GM is building a future with electric models across its four core brands - Chevrolet, Buick, GMC, and Cadillac - making waves in a rapidly growing market.
Valued at a market cap of $57 billion, shares of the auto giant rallied 45% over the past 52 weeks. In 2024, GM outperformed not just Ford, but also the S&P 500 Index's ($SPX) 25% gain, showcasing its strong momentum and resilience in a shifting automotive landscape.
Like Ford, General Motors also hit the brakes on dividends during the pandemic in April 2020. It reignited its shareholder rewards in September 2022. Its most recent payout of $0.12 per share reflects a steady return to form. With an annual dividend of $0.48 and a modest yield of 0.9%, GM’s lean 4.5% payout ratio hints at plenty of road ahead for potential growth.
GM stock is priced at 4.95 times forward adjusted earnings, which looks like a bargain in comparison to Ford.
GM Surges on Strong Q3 Results
General Motors revved up its momentum with Q3 earnings results that surpassed expectations, sending its stock soaring nearly 10% on Oct. 22. Revenue climbed 10.5% year-over-year to $48.8 billion, while adjusted EPS jumped 29.8% to $2.96. Operating profit, or adjusted EBIT, also cruised past estimates, hitting $4.1 billion.
GM’s U.S. EV sales surged 60% in Q3, fueled by an expanding lineup of new, more affordable EVs. But while the EV boom is gaining momentum, overall new vehicle sales dipped, as gas-powered pickups and SUVs still dominate the scene. Cost-cutting measures have been aggressive, with layoffs and a $1 billion annual savings from scrapping its robotaxi program. GM’s strategic restructuring in China also signals a possible retreat from the challenging mainland market.
Leveraging a strong adjusted FCF of $5.8 billion, GM has repurchased nearly 20% of its shares since launching a $10 billion buyback plan last year. To keep the momentum going, the company topped it off with an additional $6 billion in June, showing confidence in its future and rewarding investors.
Despite global headwinds in the automotive industry - ranging from China’s preference for domestic brands to Europe’s struggles with cheap EV imports - GM stood resilient. While competitors like Toyota (TM) and Volkswagen (VWAGY) slashed forecasts, GM defied the trend, raising its 2024 guidance for the third straight quarter. The automaker now anticipates adjusted pre-tax earnings between $14 billion and $15 billion for fiscal 2024, up $1 billion on the low end from prior projections. Fiscal 2024 adjusted EPS is estimated to be between $10 and $10.50.
CEO Mary Barra highlighted GM’s dual focus on optimizing profit margins for both traditional cars and EVs. While still facing losses in its EV segment, GM hit a milestone by achieving variable cost profitability on EVs, targeting broader profitability in Q4. The CEO mentioned that the company remains on track to produce and wholesale about 200,000 units in North America this year. The management projects a significant reduction in EV losses - between $2 billion and $4 billion - next year.
Analysts tracking GM project the company's bottom line to rise 34.6% year over year to $10.34 per share in fiscal 2024, and surge another 2.7% to $10.62 per share in fiscal 2025.
In contrast to its cautious view on Ford, Jefferies reaffirmed its "Hold" rating on GM, citing the automaker's strong capital allocation strategy and solid operational performance. While 2025 may bring challenges, including potential changes to EV policies and competition from Stellantis (STLA), Houchois and the team remain optimistic about GM's earnings and ability to execute share repurchases.
Unlike Ford, Wall Street is optimistic about GM stock, with a consensus “Moderate Buy” rating overall. Of the 25 analysts in coverage, 11 advise a “Strong Buy,” one suggests a “Moderate Buy,” 11 maintain a “Hold,” and the remaining two recommend a “Strong Sell.”
While GM's mean price target of $60.19 indicates potential upside of 15% over the next year, the Street-high price target of $98 suggests the stock could rally as much as 87% from current levels.
F vs. GM: Which Auto Stock Is a Better Buy?
As 2024 winds down, the battle between Ford and GM - two auto behemoths navigating the EV revolution - intensifies. Yet, General Motors stands tall, proving itself the sturdier pick for investors, with GM’s operational prowess stealing the spotlight. Dominating the U.S. auto market and trailing only Tesla (TSLA) in EV sales, GM pairs innovation with financial discipline - consistently beating earnings expectations and striding toward EV profitability.
In contrast, Ford has stumbled under mounting EV losses, escalating warranty costs, and inflationary pressures, overshadowing its alluring dividend yield. Jefferies’ downgrade of Ford underscores these challenges, while GM maintains its “Hold” status, signaling resilience amid market turbulence.
For investors, GM's disciplined cost management and aggressive share buybacks outshine Ford's attractive dividend, further amplifying the price action divergence between the two stocks. In the ongoing Detroit showdown, GM emerges as the stronger contender and is better positioned for future market opportunities.
