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Will Weakness in Ford and GM Shares Continue?

Sigma Investment Counselors

July 24, 2012

Despite improving domestic sales, Ford and GM shares have not kept pace with the market, as measured by the most of the popular averages. GM’s US vehicle sales were up 15.5% in June and up 4.3% for the first six months of 2012. For the same periods, Ford reported gains of 7.1% and 6.6%. But both company’s shares are down in a generally up market.

We see two significant problems, with no easy, short-term solutions, US market share and Europe. While both companies reported improved US vehicle sales for the first half of 2012, both lost market share. GM’s six month share declined from 19.9% to 18.1% and Ford’s fell from 16.9% to 15.7%. This is not particularly surprising as some Japanese manufacturers suffered production impairments during 2011 with corresponding losses in market share. As these were primarily due to nonrecurring weather related issues, a rebound in 2012 was expected.

Improving domestic market share is largely a function of effective execution of new product development and launch in an environment of competitive costs. We believe that both companies are now more favorably positioned than prior to the GM bankruptcy and domestic gains are likely to reflect management decisions and execution.

Europe is another story. Both companies are losing market share in a generally soft market for motor vehicles and weakening economies. Moreover, European labor laws and existing labor contracts make it very difficult and expensive to bring capacity in line with demand. Both companies have warned investors that losses are likely to increase in the second half of 2012. Progress in Europe is likely to be slow and difficult. Competition, particularly from the major German manufacturers (Mercedes, BMW and VW), is formidable and right-sizing capacity is likely to require extensive, expensive and probably painful negotiations.

Your thoughts are welcome.

Walter J. Kirchberger, CFA

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