A Bearish Look at Detroit's Bulls

You don’t have to go too far to find a pundit who will take a shot at Detroit’s carmakers. But today, two investment writers have gone bullish on General Motors and Ford. BusinessWeek’s Gene Marcial writes in today’s installment of BW Online that the patient investor may find Ford a nice bargain at today’s share price of under $7. A new-car renaissance and a back-loaded union agreement signed last fall should bear fruit at the end of the decade.

Same, too, for GM, which trades for less than $18 a share, writes Vito Racanelli in the June 2 Barron’s cover story “Buy GM.” His case for an investment in GM says that if the auto maker can weather the next 12 or so months of economic malaise and a bum housing market, the same union contracts and a styling and engineering renaissance could produce huge dividends. On that part of his argument, Racanelli is correct. GM’s union contract sets up a union-led healthcare fund, which will strip $4 billion to $5 billion in healthcare costs off its books. Add in the savings from buying out 19,000 workers and the company could even have an cost advantage on Toyota in a couple of years. Under Vice Chairman Robert A. Lutz, GM has recently turned out a slew of hits like the Cadillac CTS, Buick Enclave suv and Chevrolet Malibu.

But there are a couple points that Barron’s makes that are perhaps underplay the risk. First, is an assertion backed up by J.D. Power that GM may start gaining market share in the next couple of years. That’s tough to see happening. For every great new Malibu, there are a passel of suvs and even passenger cars like the Pontiac G6 and Buick Lucerne that are slumping. And while Barron’s quotes one investor saying that GM is relevant to consumers again (the company is gaining favor with buyers) its brands are still better known for pickups and suvs than passenger cars. When it comes to smaller cars that are selling in today’s market, GM and its crosstown rivals have work to do. GM can’t afford to market eight brands and 50 or so nameplates. That’s why, even with better cars coming out all the time, GM has a tough time winning new buyers. Its own executives admit that they can’t cut their way to prosperity. The company needs to grow sales at home. Same goes for Ford. So long as that’s a challenge, Detroit’s financial turnaround will be a risky play to bet on.