Poor Wall Street, it’s putting enormous pressure on General Motors and Ford to boost their stock prices.
But over the past five years soaring sales, strong revenue growth, handsome dividends, big buybacks and record profits failed to budge their stocks. In fact, they fell. It’s time for the investment community to face the cold, hard facts. They can’t change the market’s psychology, and the market is down on autos.
The past five years have been a golden time for automakers, their suppliers and their bottom lines. Everyone is making big bonuses or getting healthy profit-sharing checks. There’s a waiting list at the country clubs again and it’s hard to get reservations at the fanciest restaurants. But you wouldn’t know it from automotive stock prices. Almost all of them trade at half the average price-to-earnings (P/E) ratio of the S&P 500.
What makes this all the more maddening is Tesla. Despite never posting a profit for any of the 16 years it’s been in business, despite doubling its debt load in the past year, and despite burning through cash at a breathtaking rate, the stock market values Tesla more than GM or Ford. It’s the classic example of irrational exuberance.
One Wall Street insider shed some insight on this. “The thinking on the Street right now,” she told me, “is don’t look at Tesla’s numbers. Don’t use any logic. Just go out and buy it because it’s going to $500 a share.”
I asked how is it possible that Tesla’s stock could continue to go up. She said, “Because there are a lot more people who don’t own Tesla than own it, so a lot more people can still buy shares.”
The allure of Tesla-like valuations have propelled activist investors like Maeva’s Harry Wilson to pressure GM into buying back shares to boost its stock price. He also wants a board seat, but GM rejected that.
So far GM has spent more than $6 billion buying back shares, and by the end of the year that number will jump to $9 billion. This action helped dramatically boost GM’s earnings-per-share, going from $2.71 in 2013 to $6.12 in 2016. So what did that do to GM’s stock price? Pffft! Absolutely nothing.
Now Greenlight Capital’s David Einhorn wants GM to split its stock into two different classes of shares, with one class tied to dividends and the other tied to future earnings. He says this will unlock as much as $38 billion in shareholder value. He also wants three board seats. Wisely, GM said no to the board seats and so far has refrained from engaging in this kind of financial engineering. But the fight is far from over.
The activist investors also have Ford in their crosshairs. It’s a key reason why Ford just gave CEO Mark Fields the heave-ho. Ford shares are down 40% since he took over. But because the Ford family controls 40% of voting rights, the activists have no hope of ever pressuring the company into giving them board seats.
Moreover, they’ve overlooked the fact that Ford has the highest P/E ratio of all the major automakers in the world. Even more telling, all the major automakers have P/E ratios that are half the S&P average, so it’s not just a Ford and GM thing. (Tesla, of course, does not have a price-to-earnings ratio because Tesla has no earnings.)
Even though share prices have fallen since 2014 at money machines like Daimler and Toyota, the activist investors don’t dare go after them or any other non-U.S. automaker. They know it’s a futile effort. The European, Japanese, Korean and Chinese governments would quickly snuff out any attempt at a boardroom putsch. That leaves GM and Ford as the only vulnerable targets, and we’re mainly talking about GM.
Automakers and suppliers are investing heavily in electrification, autonomy and mobility services, and the payoff could be huge. But not in this decade.
So my advice to the activists is: surrender, sell and go somewhere else. Come on back in a decade or so when (hopefully) today’s mobility investments look like brilliant moves. Maybe then the market’s psychology will switch to irrational exuberance. Right now it’s a lost cause.