What's Wrong With Ford and GM Shares?

Tickers in this article: F GM TM

DETROIT ( TheStreet) -- Despite steadily rising U.S. auto sales, shares in Ford (F) and GM (GM) have failed to keep up with the rising equity markets.

Since Jan. 1, Ford shares are flat and GM shares are down about 4%, while the S&P 500 is up 9% and the Dow Jones Industrial Average is up 10%. Ironically, the stocks are lagging even though recovering auto sales have been a pocket of strength in the economy and were a key element in President Obama's 2012 campaign for re-election. Nevertheless, the two companies' broad global footprints are hurting them today.

"The biggest factor weighing on these companies is Europe," said S&P Capital Markets analyst Efraim Levy, in an interview. "As you get more clarity on a turnaround in Europe, on if that will happen and when, it will relieve pressure on the stocks. In the U.S., both companies are doing well and are gaining market share."


Ford and GM both hit 52-week highs on Jan. 15, when Ford touched $14.30 (reached again on Jan. 17) while GM touched $30.68. The high marks reflected the enthusiasm surrounding the Detroit Auto Show , where both Ford and GM highlighted promising new products. Subsequently, fourth-quarter earnings reports disappointed investors, even though Ford beat estimates, because of lower-than-anticipated margin outlooks in both cases.

On Tuesday, Ford closed at $13.39 and GM closed at $28.37.

Looking ahead, the impending impact of 23 new product introductions by 2017 seem likely to boost GM's market share, which declined to 18% in 2012 from 19.6% in 2011. "GM had been suffering from a dearth of new products because it was headed to bankruptcy, but now it's bringing new products to market again," Levy said.


Nevertheless, Levy downgraded GM shares to hold from buy following the Feb. 14 earnings report, reducing his 12-month target price to $31, reflecting weakness in Europe and an increase in the expected tax rate to 35% from 10%, partially offset by a $600 million reduction in depreciation charges following an asset write-down in Europe. Jefferies analyst Peter Nesvold has a hold and a $29 price target.

Levy dismissed the suggestion that GM's share price has been impacted by the U.S. Treasury's sale of $490 million worth of GM shares in February, when shares traded between $26.19 and $29.36, equating to a sale of about 17.5 million shares. Average daily volume is around 11 million shares.

"If there is a value in the stock, the stock should move towards its natural value regardless of the potential overhang from selling shareholders," Levy said, adding. "$500 million worth of stock is not so much for GM."