Interactive Investor

Two cheap stocks with recovery potential

The outlook for this pair is much better than it was a year ago, and while you shouldn’t expect fireworks, overseas investing expert Rodney Hobson thinks they’re both worth owning now.

10th January 2024 08:48

by Rodney Hobson from interactive investor

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Major motor manufacturers in the US suffered a lengthy strike in the autumn that has resulted in a crippling wage bill just as they were forced to concede lower prices to customers. Yet they enter the new year in good spirits and with better prospects than they did 12 months ago.

The six-week stoppage called by the United Auto Workers (UAW) hit all major vehicle manufacturers in the motor town of Detroit for the first time. It finished at the end of October with a clear victory for the union, winning a 25% pay rise, guaranteed adjustments to offset inflation and an extra uplift in wages for lower paid less experienced workers. There will also be a right to strike against any proposals by manufacturers to close factories.

Ford Motor Co (NYSE:F) alone reckons the new deal will cost $8.8 billion over the four-and-a-half year duration of the agreed new contract.

Previously, the UAW has picked on each manufacturer individually in turn. At least the total stoppage left all manufacturers on an equal footing. Although the agreed deal is tough on vehicle makers, putting margins under pressure, there is a positive side to it: the union made significant concessions during the economic crisis in 2008 and it was able to argue that “record profits mean record contracts” now.

The manufacturers and workers all realised that 2023 was a better year for the industry than expected and forecast sales for next year have been upgraded. Over the full year 15.5 million vehicles were sold in the US, an increase of 13% over 2022.

There are genuine hopes that, despite economic headwinds, car sales in the US will get back to the 17 million level enjoyed before the pandemic. A reasonable projection is 16 million over the next 12 months, especially as supply chains have improved.

Not so encouraging is that Americans are opting for less expensive models. General Motors Co (NYSE:GM), the top seller, admits that vehicles costing less than $50,000 sell on average in less than 30 days while more expensive models hang around for 47 days.

Ford itself reported higher sales of electric and hybrid cars in the fourth quarter, especially in the US, where hybrids were up 56% and all-electrics 28%. This was much higher growth than in the first nine months and took the full-year improvements to 25% and 18% respectively.

Admittedly, sales were boosted by special offers by manufacturers and dealers to attract customers hit by high interest rates and lingering inflation, but in the economic circumstances the performance was highly creditable.

Ford shares hit a short-lived unrealistic peak of $25 two years ago but have mostly been bubbling along around $12 since then, apart from when they dropped briefly below $10 while the strike was on. At the current level the price/earnings (PE) ratio is an undemanding 7.8 while the yield is attractive at 5%.

Ford Motor.PNG

Source: interactive investor. Past performance is not a guide to future performance.

GM shares made several attempts to break above $60 during 2021 but have settled around the current level of $36.50, with $31 looking to be the floor if one ignores the temporary strike-induced dip to $27. The PE is even lower than Ford’s at 5.1 but the yield is only 1%.

General Motors.PNG

Source: interactive investor. Past performance is not a guide to future performance.

Hobson’s choice: Early last yearI marginally preferred GM, but the position is now reversed with the stock market rating on GM justifiably lower. At least there is a decent yield at Ford to compensate if the shares fail to hold up as well as I expect. However, both companies are worth considering as a ‘buy’ now that the outlook has brightened considerably. Just don’t expect shares in either company to soar dramatically during 2024.

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.

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