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Foreign markets keep auto makers stuck in neutral

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Domestic car makers have led the U.S. economic recovery. U.S. car sales, powered by cheap credit and an ageing vehicle base, are projected to reach 15.4 million units in 2013, which equates to 10 per cent annual growth since the market hit bottom in 2009, when just 10.4 million units were sold. (Note: a decade ago annual sales consistently hit 17 million units.) Yet the sales rebound is not doing much of late for share prices as, unfortunately, General Motors and Ford must ride along with a bumpier global economy.

The S&P 500 is up about a tenth this year, but GM and Ford are unmoved. It is difficult to argue that they are cheap, however; their shares are trading at 8.4 times and 9.1 times forward earnings respectively, which is a fifth higher than their median forward multiple since the start of 2012. Consensus analysts' estimates of GM's forward earnings are 20 per cent and Ford's are down a tenth from their peak levels in the past 15 months.

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The car makers' biggest challenge is, unsurprisingly, abroad. In 2008 Ford's European operations had revenue of $40-billion and pre-tax profits of $1-billion. For 2013 Ford is staring at a European loss of $2-billion on $25-billion revenue, and a total of $3-billion in losses outside the U.S., according to Jefferies. Its U.S. division, meanwhile, should earn a cool $9-billion.

GM, at the moment, may be better positioned geographically than Ford. Both have about 60 per cent of revenues in North America. However, Europe is a tenth of GM revenue while it is about a fifth for Ford. In China, which on Monday reported passenger vehicle sales up 20 per cent this year, GM tops the market. And the whole of Asia represents a fifth of GM's revenue, according to Deutsche Bank, compared with only a tenth for Ford. Regardless, the U.S. market, even with looming interest rate hikes and timid consumers, may need to persist as the profit engine.

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