Citi On Why GM, Ford Are Not Car Stocks...

Ford Motor Company F and General Motors Company GM aren’t just car companies. In fact, Citi analyst Itay Michaeli believes that pickup trucks play a much more important part in the two companies’ bottom lines than many seem to appreciate.

In fact, Citi estimates that trucks account for up to two-thirds of Ford and GM’s North American profits.

Related Link: Expect U.S. Light Vehicle Count Around 17.5M Units For April

“What’s surprised us most over these three years is that—despite very strong pickup truck performance – the street seemingly settled on simplistic explanatory storylines like 'housing'—implying that pickup strength wasn’t & isn’t anything special or unique,” Michaeli explained.

Citi still sees pent-up demand for pickup trucks, an indication that GM and Ford have some high-margin earnings growth ahead. Citi estimates that the pickup installed base has grown at a compound annual rate of about 3.0 percent since 2001, while the light-vehicle market has growth at less than 1.0 percent annually.

Michaeli believes that the pickup truck earnings of these companies most closely resemble those of Class 8 Original Equipment and Industrial stocks and should be valued as such. Citi calculated sum-of-the-parts valuations for GM and Ford based on a 15x multiple on North American pickup earnings.

According to Michaeli, this sum-of-the-parts valuation indicates that GM’s stock is worth $44, while Ford’s is worth $15.

Citi maintains a Buy rating on GM and a Neutral rating on Ford.

Disclosure: The author holds no position in the stocks mentioned.