This Auto Company Continues to Separate Itself As the Clear Leader
Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The automotive industry continues to prove itself as the strength of the economy, producing jobs and strengthening its ecosystem with new fuel saving initiatives. June’s U.S. auto sales further prove my point – making the whole space a buy – but one company is the most attractive.
Above & Beyond Expectations
For the month of June, sales more than tripled expectations with a 6% year-over-year gain to 264,843 units. Of course, crossovers remain top performers with gains of 9%, but trucks/SUVs with an 8% gain also impressed.
For General Motors, sales rose 6% as a 38% rise in Cadillac and a new all-time best for the Chevy Volt led the company to beat expectations. Yet, strangely, despite these strong numbers, shares still traded flat to modestly lower on Tuesday. The reason: Strong performance by Ford, as it shows that it is currently the best performing company in the space.
Ford saw its stock rise by 2.6% on Tuesday, coming behind a 13% year-over-year gain in monthly sales. Much like GM, cars were strong, contributing a 12% gain as the largest segment. However, it was the continuation of strength among trucks that really impressed investors, as the segment rose an inspiring 20%.
Is It Time to Buy Auto Makers?
In this economy, we simply don’t see massive segments of the U.S. growing at such rapid rates, nor do we see the largest of these companies leading the way with year-over-year growth. Yet, this has been the trend for the better part of four years, as GM and Ford have rapidly recovered from the recession.
Most people look at the past year for these auto makers and see fairly strong periods of performance. Both stocks have gained approximately 75%. Yet, what very few realize is that both are actually underperforming the market on an extended chart period.
Since January 2011, GM has traded with a loss of 2.45% and Ford has lost 3.7% of its valuation. During the same period, the S&P 500 has produced gains of 28%. With the auto industry being the fastest growing of the large economic industries, I find this as a reason to buy.
Where Have the Gains Gone?
Strangely, as GM and Ford have consistently produced high single digit to low double digit year-over-year sales growth for the last three years, both have underperformed the market. Indirectly, gains have been given to those companies who benefit from auto strength, such as Sirius XM (NASDAQ: SIRI)
Sirius XM offers its satellite radio in new vehicles, then benefits when buyers become subscribers after a trial period ends. During its last quarter, Sirius XM grew revenue 11.5% year-over-year, which is slightly better than the rate of new car sales growth. Thus, Sirius XM has benefited from a higher volume of cars sold, not necessarily from a far better rate of execution.
In my opinion, this trend could abruptly change: GM and Ford are already beginning to outperform the market and a company such as Sirius XM is now facing new competition, forcing the market to reassess their plays on auto strength.
Which One Is the Best?
While I believe that you can not go wrong with an investment in either Ford or GM, I do believe that Ford is the best and safest choice.
Both stocks are similarly valued relative to sales and earnings, but it’s the other less talked about metrics that give Ford the edge.
For example, both companies saw strong unit growth over the last year, but during the last quarter, GM saw its sales decline 2.3% while Ford’s rose 10.4%. This indicates that Ford is selling more high-priced vehicles.
In addition, Ford has operating margins of 4.83% compared to 1.45% for GM, showing that Ford is the more efficient of the two. Finally, Ford returns a dividend of 2.5% to shareholders, while GM does not.
As a result, I think Ford gets the edge, although I think the entire industry, and especially these two companies, are without question a “buy”!
The best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.
Brian Nichols owns shares of Ford. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. 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!