2 Undervalued Automakers to Consider Now, 1 to Watch
Bill is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When one thinks of the companies outside the finance industry that received federal largesse under the stimulus package, one often thinks of failure, and for good reason. The failures of A123 Energy Solutions, now wholly owned by China's Wanxiang Group, and Solyndra, among others, pretty much took care of that. But there have been successes as well.
Is there more room for Tesla to run?
The most spectacular success, and to me unexpected, has been that of Tesla Motors (NASDAQ: TSLA). I am going to look at Tesla and some of its competitors today. Tesla has been on a historic run of late, its stock price zooming from about $35 a share in early April to $110 per share by late May. It has since settled in the upper $90s. What brought about this spike was a combination of first-quarter financials, along with superb product reviews and other product developments. The first quarter of this year was Tesla's first profitable quarter in its 10-year history. Earnings came in at $11.4 million or 10 cents per share on a GAAP basis, and $15.4 million or $0.13 per share on a non-GAAP basis. Revenue growth was stunning, from $30 million in the first quarter of 2012 to $561 million in the just-completed quarter.
What has driven the revenues and resulting profits has been very well-received products. The auto business has always been product-driven, and a leading consumer magazine rated Tesla's new model S with the top grade it has ever awarded. The model S, which comes with a base price just south of $70,000 (not including any tax credits) and a 200-mile range, was also awarded as Motor Trend's Car of the Year for 2013. With fanfare reminiscent of Lee lacocca in the 1980s using an oversized check to pay back Chrysler's federal loans, Tesla CEO Elon Musk did much the same thing in paying back Tesla's federal loans nearly 10 years ahead of schedule.
So all is good with Tesla, with management and products in place. But oh, that stock price. Even assuming tremendous intermediate growth of 50% in profits annually, it will be four years before its price-to-earnings ratio falls to 30, even if the stock price stays unchanged. This is a clear case of enthusiasm and emotion dominating rationality, and as much as I like Tesla as a company, I cannot see any way to endorse a purchase of Tesla stock.
Can Ford solve Europe?
Tesla is not the only profitable company with a strong environmental ethic. For 14 years, Ford (NYSE: F) has been issuing annual sustainability reports. Under CEO Alan Mullaly's leadership, the company has adopted a target of a 30% reduction of carbon emissions per vehicle manufactured by 2025. This is after dropping its carbon emissions by 37% per vehicle from 2000 to 2010. I know of no other old-line manufacturing company with that sort of ethic.
Otherwise, Ford, like its larger cousin General Motors (NYSE: GM), is recording outstanding North American results, but being dragged down by a long-term recessionary Europe, with little hope in sight. European sales in the first quarter were down 8% over already depressed 2012 sales. Ford is attempting to “right-size” its European manufacturing, but no matter how one slices it, the division is going to lose in the neighborhood of $2.4 billion this year. First-quarter sales in North America were a 10-year high, and Chinese/Asian sales are also strong. But Europe's morass will drag down Ford's earnings this year to roughly $5.7 billion, or $1.45 per share, up marginally from 2012.
Looking ahead, I cannot help but think the European situation will improve; either that or a company like Ford should just walk away. There is little doubt that absent a macroeconomic calamity, Ford's North American Business will continue its success. Ford has also doubled its dividend to an annual $0.40 per share in the first quarter, driving the yield to 2.8%. Of the big auto companies, Ford is probably my favorite for those interested in a long-term holding in the auto industry.
The worldwide juggernaut soldiers on
Toyota (NYSE: TM) is a company that is hitting on all cylinders right now. Not only does it have a nearly 50% market share in its home market, in the first quarter, it actually increased its European sales by 4% versus the same quarter of 2012. Net for 2012 was double that of 2011, in part due to earthquake-related struggles in the earlier year, but Toyota seems over its product quality issues. Yet there is always room for improvement, and management's latest goal is to reclaim its high-performance heritage of the 1990s-era Supra, in order to update the company's fairly “frumpy” image.
For fiscal 2013 (started April 1, 2013), boosted by a new and improved Corolla, I look for strong revenue and profit growth for the company worldwide. I look for earnings between $9 and $10 per ADR, versus the $7.24 in fiscal 2012. And out to mid-decade I look for the company to eclipse its 2007 high of $12.93 per ADR. The only reason I prefer Ford to Toyota is my own provincial bias. Toyota would make a fine long-term holding for many investors.
Getting out from the government's umbrella
Unlike Ford, GM received government money late last decade, and then still went through a bankruptcy proceeding, after which the U.S. Treasury held the bulk of ownership, nearly 61%. But a series of government sales of GM stock has whittled that stake down to under 14%. The treasury will lose money on its initial $49.5 billion bailout, but GM is again a productive corporate employer with over 200,000 individuals. The company's return to normalcy was confirmed by Standard & Poor's announcement that GM would be again included in its 500 index.
GM is this country's largest automaker, with a worldwide market share just north of 11% in the first quarter of this year. That market share stands to rise as GM continues its robust pace of introducing new and updated vehicles.
Financially, GM's situation is similar to Ford's, with the North American and Asian markets going well, and Europe being a substantial drag on earnings. But GM appears ahead of Ford in adjusting itself to economic realities in Europe. Citigroup analysts see GM losing about $1.5 billion this year in Europe, and expectations are to break even there by 2016. If that happens, and margins expand like I believe, GM can be an earnings juggernaut, and near 20% annual profit growth is possible over the next three to five years. I see GM as having perhaps more upside, but perhaps a bit more risk than Ford or Toyota.
Automotive companies are benefiting generally from prolonged low interest rates and steady, albeit slow, economic growth. I believe many of these companies, save for Tesla, are undervalued relative to the earnings strength and would make fine additions to many portfolios.
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Bill Edson has no position in any stocks mentioned. The Motley Fool recommends Ford, General Motors, and Tesla Motors . The Motley Fool owns shares of Ford 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!