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Ford and GM get Thumbs Up from Morgan Stanley

The auto companies have met a series of challenges in recent years. Foreign competition, the overall decline of heavy industry, and changing technology, have all impacted the bottom line. But where the Dow Jones has gained 11% year-to-date, Detroit’s two largest car companies, Ford and General Motors, have both beaten that. Ford is up 21% so far this year; GM’s gain is 16%. But while they have adapted, and even thrived, they have had to dodge their share of potholes.

In the past year, Ford has slashed factory jobs, but also started an $11 billion investment in electric and autonomous cars. GM has seen income from its China operations drop sharply, even while sales of popular truck and SUV models show gains. In all of these conflicting signals, Morgan Stanley’s 4-star analyst Adam Jonas sees reason to expect gains in the near- to mid-term for both companies. He laid out the case for each after their Q2 2019 earnings reports.

General Motors Company (GM)

The largest of Detroit’s storied ‘Big Three,’ GM reported on August 1. The company showed strong gains, with EPS and revenues both beating expectations. The $36.1 billion in quarterly revenues just squeaked over the $35.98 billion estimate, while the $1.64 EPS was 13.9% over the forecast. CFO Dhivya Suryadevara said of the results, “We had a solid second quarter and expect the second half of the year to be stronger than the first half… based on our strong full-size truck rollout, other key launches and ongoing cost savings.”

Analyst Jonas raised his share price target on GM after the earnings and revenue beats, boosting it 4.5% to $46. His bullish stance on GM is conditional, however; Jonas said earlier this year that GM is using current high profits from the US pickup and SUV markets to hold up the bottom line even as international sales (especially China) slow down. He stands by that assessment, along with his statement that “Electric vehicle investment is going to be needed soon, as well as investment into self-driving cars.”

Chalk up GM as Jonas’s near-term choice for automakers. The company’s current strength and profitability keep it a Strong Buy in the analyst consensus, based on 9 ratings in the last three months. Of those, 7 have been Buy and 2 are Hold. GM shares are trading at $39 and have an average price target of $50, giving the stock an upside potential of 28%.

Ford Motor Company (F)

With its long-time policy of keeping share prices low and dividends high, Ford has built a strong reputation for rewarding shareholders and attracting small-time investors. That didn’t help the company in Q2, however, when losses in China and a $181 million write-down of its investment in Pivotal Software pulled EPS below the estimates. The company reported 28 cents per share earnings, opposed to the 31-cent forecast. Revenues, of $35.76 billion, beat the $35.07 billion estimate.

Shares in Ford slipped 7.5% following the earnings losses, but analyst Jonas sees this as a net positive. In his research note, Jonas says, “[The stock dip] is a buying opportunity and a resent of expectations [for fiscal 2019].”

Going on, Jonas added, “We like Ford’s restructuring actions, strategic actions, and product mix enhancement. Our previous concerns over Ford’s ability to maintain its dividend payment have largely subsided.” Ford’s dividend, while a modest 60 cent annualized payout, represents a high 6.42% yield.

Jonas’s bullish stand on Ford is reflected by his upgrade on the stock. He changed his stance from hold to buy, citing the “significant increase” the company expects in net revenues and earnings over the next three years. His current price target, $12, represents a 28.8% upside to the current share price.

Ford’s Moderate Buy from analyst consensus is based on 4 buy and 3 hold ratings set during the past three months. The average price target, $11.92, gives the stock a 27% upside potential from the current share price of $9.31.