My Best Bet on the Auto Industry
Masam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The auto SAAR has recently been flying high. This has definitely increased investors’ interest in the auto stocks. However, in this situation, it should not be forgotten that the same companies that are enjoying a surge in sales in North America are taking a beating in Europe due to adverse economic conditions.
Which Auto Stock to Buy?
Though the North American market gives us an option of trading in plenty of auto stocks, the ones with high trading volume are only four stocks:
1) Ford (NYSE: F)
2) General Motors (NYSE: GM)
3) Toyota Motors (NYSE: TM)
4) Honda Motors (NYSE: HMC)
Of course, Tesla Motors is another charming stock in the auto industry. However, given its uniqueness, it will not be justified to compare it with the Fords and GMs of the auto world. I have already covered Tesla in detail in two of my earlier posts.
Before covering the North American stocks, I would like to shed some light on the Japanese players. Both Toyota and Honda saw massive YoY gains in revenues in 2012, thanks to the tsunami in Japan in 2011 that caused heavy damage to the Japanese automakers’ sales. However, these companies are facing tough times in China where the Senkaku/Diaoyu island dispute has engendered extreme hatred for the Japanese products. Macquarie Securities has projected a 10% YoY decline in Japanese cars in the first quarter of 2013.
Ford vs. GM
GM has been on the buy list of my many analysts since the US Treasury plans to sell 200 million GM shares, valued at about $5.5 billion, back to the automaker. Once this transaction is completed, the Treasury will be left with only 300 million shares of GM. GM wants to rid itself of the tag “Government Motors.” Executives are frustrated by the salary caps imposed by the Government, which has hampered the company’s ability to hire fresh blood from the market. The CEO wants to change the bureaucratic nature of the company which was responsible for its failure back in 2009.
However, though I am bullish on the Government offloading its stake in GM, the stock cannot be called as an ideal investment considering its heavy losses in Europe. GM’s plan to turn its whole portfolio over is a bullish sign for the company; however, it will take at least 18 months to implement the whole turnaround. This is the reason why GM’s CFO expects flattish 2013 earnings and margins.
On the other hand, Ford looks like a great opportunity for investors. I have two reasons to believe this:
1) A super dividend yield
2) One Ford program
The Street was taken by surprise when Ford announced its plans to double its quarterly dividend to $0.10 from $0.05. This has resulted in almost a 3% dividend yield, roughly on par with the highest yielding auto parts suppliers stocks; I am referring to Autoliv (has a dividend yield of 3.02%) and Gentex (has a dividend yield of 2.7%).
Ford has streamlined its operations substantially under the One Ford strategy, selling off non-core businesses and brands. Its management, designers and engineers around the world are now squarely focused on supporting the core Ford brand. As a consequence, the Ford team is now more focused and working more effectively together than ever before and has accelerated the development of desirable new products that are global in nature. Ford’s aggressively restructured North American operations are now lean and highly profitable, with the One Ford strategy seemingly having helped solve the long beguiling puzzle of how to turn a profit on small cars in the United States. Ford is also determined to bring around a change in the European operations. Its plan of launching 15 new vehicles in the next five years has sent bullish signals to the market.
The rising US SAAR provides the investors with a unique opportunity to make money in otherwise recessionary times. To me, Ford, with its solid dividend yield, strong position in North America and a strong global restructuring plan, seems to be the best option out there.
AnalystX has no position in any stocks mentioned. The Motley Fool recommends Autoliv, Ford, General Motors, and Tesla Motors . The Motley Fool owns shares of Ford, Gentex, and Tesla Motors . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!