Autos Are a Necessity, But the Market Doesn't See It That Way

Bill is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Many investors like automobile and tire companies because they know that gas powered cars and rubber tires are largely unavoidable purchases in the modern world. There seems to be some truth to this since, at least as long as electric car companies like Tesla Motors (NASDAQ: TSLA) have not won-over mass support for their products. However, this does not necessarily mean that investors should flock to the stocks of automakers. Instead, they should consider if any of them are attractively priced.

Tesla Motors media debacle

Tesla Motors Chief Executive Officer Elon Musk insists that a range test conducted by the New York Times of the Model S electric sedan was “fake” as the reporter did not provide the details of his drive.

The New York Times published a story prepared by John M. Broder on its website, providing details about how the Model S he drove could not meet the electric sedan’s 300-mile (483-kilometer) range under perfect and best conditions whilst driving in temperatures as low as 10 degrees Fahrenheit. It also published a blog posted by Broder about the test-drive he did, providing his plan to use the Tesla’s new supercharger stations. Eileen Murphy, a spokeswoman of New York Times said that Broder followed all the instructions which he was provided through multiple conversations with the company’s people. She also said that the story was completely factual as it described the trip in detail and explained whatever actually happened. Any proposition that the story is “fake” is certainly untrue.

In response, Musk, the biggest shareholder of the company, said that the company’s blog is being prepared to offer detail about Border’s drive and explain what actually happened. He said that Broder made three mistakes during his test drive: first, Broder did not fully charge the car; second, he drove rush hour in New York; and third, he drove over the speed limit. Musk said, “You can’t do that, whether it’s a gasoline car or an electric car, and expect to achieve the top range.”

In response Border said on New York Times that his account was not fake and said that it happened just the way he described it. The Times said that it is not the first time that Musk has been critical of a media report about the electric vehicle range. In 2008, the Top Gear BBC television show used data loggers in test cars post an unflattering review of the company’s first model, the Roadster. The company filed a suit against the program in 2011 for alleging libel and malicious falsehood, stating that Top Gear faked a scene that displayed to show the Roadster was running out of energy. According to reports of the Telegraph and Guardian newspapers, British courts have dismissed the suits in October 2011 and February 2012.

According to Musk, “If we have been wronged and facts are on our side, I believe in speaking out…It is not as if I do this all the time -- several thousand articles have been written and I have only objected to a few of them.” The New York Times tale and blog post detailed a test drive on Interstate 95 on the US East Coast. Broder intended to recharge the car using rapid charge stations the company has installed in Delaware and Connecticut, during his drive. The company is in the process installing various stations to fulfill Musk’s goal of making it possible to drive cross-country in a Model S. During the journey, Broder said that the car ran out of power and had to be carried on a flatbed truck.

The company is expected to release its fourth-quarter results during February and has said it would build a minimum of 20,000 Model S sedans during the year at its California factory. It also plans to add the Model X electric sport-utility vehicle in 2014. The company is planning to earn a profit from the Model S during this year.

Elaine Kwei, an analyst for Jefferies, “After digging into the background behind the article, our conclusion is that operator error likely played a primary role, due to improper charging protocol.”

Europe dominating auto outlook

Goodyear Tire & Rubber (NASDAQ: GT) shares dropped about one percent after it announced that its operating income for 2013 would be lower than its earlier forecast as it tries to revamp its European operations. The company expects to earn $1.4 billion to $1.5 billion in operating income during the year, which is lower than its earlier forecast of $1.6 billion as the requirement for tires decreased with fall in auto production in Europe, representing worst auto-sales slump in 19 years. Various other automakers such as General Motors (NYSE: GM) and Ford (NYSE: F) have planned to shut down their European plants.

In January 2013, the car sales in the European Union fell to the lowest level with Ford Motor and Peugeot Citroen displayed the biggest drop due to the economic contractions in the southern part of the region increased to Germany and France. Both the companies are planning to reduce 30,000 jobs jointly and shut down five plants. Ford has estimated that its loss in Europe would increase to $2 billion in 2013 from $1.5 billion in 2012. Its sales fell to 61,544 vehicles in January 2013.

General Motors reiterated break-even expectations for Europe by mid-decade, as it reported losses in Europe that was more than doubled as compared to 2011 and expected that the market would fall further in 2013. In 2012, the company’s net income fell by 33% to $6.19 billion from its record level in 2011. While its pre-tax losses in Europe increased to $1.8 billion, finishing on the vertical end of the company’s October forecast.

Valuation

Going by financial metrics only General Motors is attractive:

<table> <tbody> <tr> <td> <p><strong><span>Ticker</span></strong></p> </td> <td> <p><strong><span>Company</span></strong></p> </td> <td> <p><strong><span>P/E</span></strong></p> </td> <td> <p><strong><span>P/S</span></strong></p> </td> <td> <p><strong><span>P/B</span></strong></p> </td> <td> <p><strong><span>P/</span><span>FCF</span></strong></p> </td> <td> <p><strong><span>D/E</span></strong></p> </td> </tr> <tr> <td> <p><span>F</span></p> </td> <td> <p><span>Ford</span></p> </td> <td> <p><span>2.95</span></p> </td> <td> <p><span>0.37</span></p> </td> <td> <p><span>2.64</span></p> </td> <td> <p><span>12.47</span></p> </td> <td> <p><span>5.34</span></p> </td> </tr> <tr> <td> <p><span>GM</span></p> </td> <td> <p><span>General Motors</span></p> </td> <td> <p><span>10.44</span></p> </td> <td> <p><span>0.29</span></p> </td> <td> <p><span>1.04</span></p> </td> <td> <p><span>41.4</span></p> </td> <td> <p><span>0.4</span></p> </td> </tr> <tr> <td> <p><span>GT</span></p> </td> <td> <p><span>Goodyear Tire & Rubber</span></p> </td> <td> <p><span>18.31</span></p> </td> <td> <p><span>0.16</span></p> </td> <td> <p><span>2.81</span></p> </td> <td> <p><span>9.57</span></p> </td> <td> <p><span>4.86</span></p> </td> </tr> <tr> <td> <p><span>TSLA</span></p> </td> <td> <p><span>Tesla Motors</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>28.81</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>NA</span></p> </td> </tr> </tbody> </table>

Data from FinViz.com

Goodyear and Ford are too levered to consider as prudent stock investments. Unfortunately, General Motors is also not a compelling investment. Yes, it trades at low price multiples. However, it is levering up and the operations recently went through bankruptcy. These do not bode well for stability.

Unfortunately, Tesla is, well, shocking. It has a negative equity value and has negative free cash flows and a net loss. Investors should not jump in at such a high price-to-sales multiple.

There are no compelling stock investments in this space at current prices.


BillEdson11 has no position in any stocks mentioned. The Motley Fool recommends Tesla Motors . The Motley Fool owns shares of 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!

blog comments powered by Disqus