Ford Shows Strength Relative to Others in the Industry
Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The high barriers to entry and cyclical nature of the auto market give an inherent advantage to the current players. Ford Motor Company (NYSE: F) is not perfect but it was not forced to ask for government help like GM during the 2008 recession. Even as Europe cools the company maintains a relatively healthy free cash flow yield as shown in the chart below.
The company's focus in the North American market means that though it will continue to be impacted by a potential break up of the Euro it will have relatively stability in other markets. The future impact of the PIGS (Portugal, Italy, Greece, and Spain) is not easy to predict but regardless it is expected that the Norther European nations will show relative strength. China is more difficult to accurately predict as the centralized command economy cannot be analyzed with the exact same principles used for a market economy. All auto manufactures are not created equally. Just as Ford showed their strength with the money they saved to weather the recession of 2008 and currently they continue to be one of the stronger auto manufactures.
The second quarter results for 2012 show how Europe posted a loss at 20% of total income for the first half of the year. Also, difficulties in Asia gave a 5.9% percent loss of total income. At the same time North America posted a slight increase in revenue and profit. These figures show that although the world is interconnected, countries do not adjust instantaneously or equally. By focusing its operations and profit machine close to home, Ford is able to reap the benefits while the rest of the world is facing difficulties.
General Motors Company (NYSE: GM) has had a hard run over the past couple years. The recent bankruptcy and declining market share do not give a warm feeling. There have been problems with executive turnover as the CMO was forced to resign in the face of declining market share. The above charts show that their low operating PE ratio comes as a sort of compensation for their relatively low free cash flow yield. Personally I think that one ought to take a wait and see approach with this company as declining market share is not something one looks for in a good investment.
Toyota Motor Corp (NYSE: TM) and Honda Motor Co., Ltd. (NYSE: HMC) show that being a Japanese car manufacturer is not always easy. With the Fukushima disaster their supply chains faced all sorts of difficulties. Currently, the protests in China against Japaneses products are giving these companies more negative PR in an important growth market. The Chinese and Japanese rivalry is not a recent invention and it is conceivable that the burning of Japanese vehicles in Japan will sporadically return. Honda has a total debt to equity ratio of .9 while Toyota sits at 1.12. This is much less than Ford's 5.03. These figures show that Ford's credit unit have a large impact on the balance sheet and is a negative factor for Ford relative to the large Japanese manufacturers.
The Japanese and American auto makers have their merits but I am inclined to place my vote with Ford. Free cash flow is the life blood of a company. It is better to have debt with the cash flow to support it than less debt with even less cash flow. The Honda and Toyota are strong companies but that does not necessarily mean they are the better investment. Ford's ability to manage their debt is not certain and should be watched carefully.
MrCanadian1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Ford. Motley Fool newsletter services recommend Ford and General Motors Company. 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.If you have questions about this post or the Fool’s blog network, click here for information.