Ford and GM Can't Challenge This Outstanding Auto Stock
The stock prices of the two largest U.S.-based automotive manufacturers have soared over the past 12 months. Ford(NYSE:F) is up an incredible 89%, while General Motors(NYSE:GM) isn't far behind, up 68%. The ongoing global push to incentivize sales of fuel-efficient vehicles has revived these Detroit automakers, and their share performances represent this investor optimism.
Both Ford and GM have significantly outperformed what I believe to be a superior auto stock, and that is O'Reilly Automotive(NASDAQ:ORLY). The leading auto parts retailer is fundamentally a better company than the car manufacturers.
Let me explain why.
Image source: Getty Images.
Detroit, we have a problem
Ford and GM, like most other automakers, possess characteristics that make their business models unattractive for quality-focused investors.
For starters, revenue is extremely cyclical. When the economy is doing well with low unemployment and solid GDP growth, it's no surprise that consumers are more willing and able to buy new cars. But on the flip side, when times are tough, many people will hold off making a purchase. Because of this, both Ford and GM experienced substantial sales declines in 2008 and 2009 during the financial crisis. O'Reilly, on the other hand, registered revenue growth of 41.8% and 35.5% in those same two years, demonstrating its recession-proof nature and benefiting from consumers extending the life of their existing vehicles.
Designing and building cars is also very expensive, incorporating the cost of parts and labor. In the most recent quarter, Ford and GM had gross margins of 10.7% and 14.8%, respectively. Even in a period with limited supply and surging demand, this exemplifies the subpar financial profile of the industry. O'Reilly's gross margin in the second quarter was a remarkable 52.7%. What's more, its Q2 operating profit margin of 23% absolutely trounces that of the two automakers.
And finally, the competitive dynamics of the auto manufacturing business are simply inferior to the aftermarket parts industry. Ford and GM have shown a vulnerability to technological disruption. Electric vehicle pioneer Tesla essentially changed the landscape of the entire industry, forcing carmakers across the world to pursue their own electric vehicles or risk falling behind. There is currently a plethora of well-funded automotive start-ups, with billions of dollars raised, trying to stake their claim as well.
Selling batteries and brake pads at brick-and-mortar locations doesn't attract the same level of attention from disruptors, which supports O'Reilly's economic moat. Over the years, the company has developed and fine-tuned an efficient and reliable supply chain and distribution network. O'Reilly is successful because it can get the right parts to its customers at the right time. It would take years for a newcomer to even try to compete with this, let alone earn consumers' trust.
The aftermarket parts business is booming
O'Reilly reported another fantastic quarter, with same-store sales (or comps) increasing 9.9% compared to the prior-year period. This is impressive because in Q2 2020, comps jumped 16.2% as people increased spending on their cars in the absence of leisure and entertainment options. O'Reilly has proven to be recession resilient in the past, but this performance proves that the company can thrive in robust economic times as well.
With a retail footprint of 5,710 stores and trailing 12-month revenue of $12.6 billion, O'Reilly is one of the largest automotive aftermarket suppliers in the country. And management's confidence in the trajectory of the business resulted in upgraded guidance for the full year.
"As a result of our second-quarter performance and strong start to our third quarter, coupled with our confidence in Team O'Reilly's ability to provide industry-leading customer service, we are raising our full-year 2021 guidance for comparable-store sales from a range of 1% to 3% to a range of 5% to 7%. We are also increasing our full-year diluted earnings per share guidance to a range of $26.80 to $27, which represents an increase of $2.05 at the
midpoint from our previously provided guidance." CEO Greg Johnson explained.
Investors have plenty to cheer about with this all-weather, low-risk stock.
The final word
Ford and GM are experiencing a resurgence as the world slowly shifts to electric vehicles. But the auto manufacturing business is burdened with its own set of disadvantages. The economics of the industry are just not beneficial for long-term investors.
Additionally, over the past three-, five-, and 10-year time periods, O'Reilly's stock has crushed that of Ford and GM. Keep this in mind when choosing which auto stock you want to invest in.
Why Ford, General Motors, and Churchill Capital IV (Lucid Motors) Stocks Are Down Today
Remember COVID-19? Guess what?
- Fast-rising cases of the new delta variant of COVID-19 have investors worried.
- While the new variant isn't likely to cause as much disruption in the U.S. as last year's outbreak, there's still cause for concern.
- Meanwhile, Churchill Capital IV shareholders will vote on the SPAC's merger with Lucid later this week.
Shares of several U.S. auto companies opened lower on Monday, amid a broad sell-off of U.S. stocks triggered by rising rates of infection with a new COVID-19 variant.
All three of these stocks opened considerably lower on Monday but recovered somewhat as the morning went on. Here's where they were as of noon EDT, relative to their closing prices on Friday.
Stocks around the world were selling off early on Monday amid a new round of concerns about COVID-19. Coronavirus cases caused by the fast-moving delta variant of the virus have been rising in many U.S. states and in other areas around the world where vaccination rates are still low.
It's not hard to figure out why investors and traders are concerned: The original COVID-19 virus caused economic havoc around the world as factories idled and supply lines were disrupted; while many people have since been vaccinated against the virus, the new variants still have the potential to do significant damage.
Ford and GM are still scrambling to make enough pickups to meet demand amid a global shortage of computer chips. A new round of COVID-related factory closures would only make matters worse. Image source: Ford Motor Company.
There didn't appear to be any significant company-specific news moving any of these names on Monday, but here are the most recent key developments on each:
- If all goes well, Churchill Capital IV won't exist for much longer. The SPAC is set to hold a shareholder vote on its planned merger with electric luxury-vehicle start-up Lucid Motors on Thursday, July 22. Assuming it's approved (very likely), the merged company will begin trading as Lucid Motors under the ticker LCID soon thereafter. Lucid's CEO, Peter Rawlinson, will continue as CEO of the combined company.
- Ford said on Friday that it is recalling over 800,000 vehicles for suspension issues, including about 35,000 2020 and 2021 Super Duty pickups and roughly 775,000 Ford Explorers made between 2013 and 2017. Ford didn't disclose the expected cost of the recalls. (That's generally a signal that the recalls won't have a major impact on earnings.)
- GM last week announced a new electric-vehicle charging service for its commercial and government fleet customers. Called Ultium Charge 360, the service's goal is to make it easier for GM's fleet customers to transition to fully electric vehicles. GM's partners in the service include up-and-coming charging network EVgo (NASDAQ:EVGO), which went public itself earlier this month.
Next up for auto investors interested in these companies is of course the Lucid Motors merger, and we should know by close of business on Thursday whether it has been approved by Churchill Capital IV's shareholders.
As for the Detroit auto giants, both are scheduled to report second-quarter earnings soon: Ford after the U.S. markets close on July 28, and GM at an as-yet-unannounced date likely to fall in late July or the first week of August.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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General Motors Co GM:NYSE
- Day High58.94
- Day Low57.08
- Prev Close58.96
- 52 Week High64.30
- 52 Week High Date06/07/21
- 52 Week Low30.95
- 52 Week Low Date10/15/20
- Market Cap83.866B
- Shares Out1.452B
- 10 Day Average Volume22.03M
- Dividend Yield0.00%
- YTD % Change38.74
- EPS (TTM)8.65
- P/E (TTM)6.68
- Fwd P/E (NTM)11.67
- EBITDA (TTM)26.795B
- ROE (TTM)27.64%
- Revenue (TTM)139.639B
- Gross Margin (TTM)15.42%
- Net Margin (TTM)9.03%
- Debt To Equity (MRQ)214.61%
- Earnings Date10/27/2021
- Ex Div Date03/05/2020
- Div Amount0.38
- Split Date-
- Split Factor-
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General Motors Co.
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General motors stock ford
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