Automakers: Should You Buy American?

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

The U.S. automakers sure have recovered nicely from the crisis they found themselves in just a few years ago.  They have taken steps to become more financially sound, as well as offer products that are considered to be at the same level of quality or better than that of their foreign competitors.  However, investors may be wondering if these companies have become good long-term investments, or if one of their foreign rivals is the way to go.   With global vehicle demand expected to rise in 2013, according to J.D. Power and Associates, I would like to compare the two leading U.S. automakers with my two favorite foreigners, in order to assess which is the most fairly valued now, and which has the best growth prospects going forward.

First, the foreign challengers:

1.)    Toyota (NYSE: TM) – The world’s largest automobile producer by market cap, Toyota sells its cars and trucks all over the world, with 49% of its revenues coming from Japan.  The rest comes from North America (21%), Asia (18%), and Europe (9%).  While the March 2011 earthquake in Japan caused the company significant losses of production, analysts now see this as in the past.  Full production capacity is back, and new vehicle launches planned for 2013 are expected to boost sales by 15% for the year. 

In terms of valuation, Toyota trades at 16.7 times TTM earnings, a premium to its peers.  The company is expected to grow its earnings to $7.93 in FY 2013 according to consensus estimates, which would mean the stock trades at 11.6 times forward earning--not bad for a company with 15% earnings growth.

2.)    Honda Motor (NYSE: HMC) – In addition to being one of the largest and most highly regarded automotive manufacturers in the world, Honda is also the world’s largest manufacturer of motorcycles.  Currently trading at 16.9 times TTM earnings, Honda is similarly valued to Toyota.  Honda is also expected to earn $3.50 per share in 2013, so Honda trades at 10.5 times forward earnings, slightly cheaper than Toyota.  Honda is more reliant on foreign business, with 78% of its net sales coming from outside of Japan.

And now for the Americans:

3.)    Ford (NYSE: F) – The second largest U.S. auto manufacturer, Ford also has considerable financing (Ford Motor Credit) and insurance operations (American Road Insurance Co.).  Ford was by far the most fiscally sound of the U.S. “big three” during the crisis, and was able to gain market share as a result.  Nonetheless, Ford has taken measures to restructure their operations in order to cut costs.  For example, the company has sold some of its brands (Jaguar, Land Rover, and Volvo), and has discontinued another (Mercury) in order to focus on its Ford and Lincoln brands.  With automotive sales on an uptrend, and expected to continue as such over the next several years, consensus estimates call for Ford’s earnings to increase from $1.34 this year to $1.46 and $1.82 in 2013 and 2014, respectively.  This means that Ford trades at only 9.6 times current year earnings, and an even better 8.8 times forward earnings.  Not too bad for a company with a projected 3-year annual average growth rate of 11%.  Ford’s balance sheet is somewhat weaker than those of its Japanese rivals, and is seen as a higher risk, hence the cheaper valuation.

4.)    General Motors (NYSE: GM) – Or, should I say “the new General Motors?"  The second largest manufacturer in the world (behind Toyota), GM emerged from bankruptcy in late 2010, completing an IPO of the new shares in November of that year.  As a result of the bailout and bankruptcy, the U.S. Treasury owned a substantial stake in the company, selling a large chunk of it with the IPO.  The company recently announced it will buy back much of the Treasury’s remaining stake within the next year or so.  This should give the company more financial flexibility and make it easier to return capital to shareholders going forward.

GM has cut some of its product lines (like Pontiac) and has sharply reduced its number of dealerships.  In addition, the billions in liabilities the company was able to shed as a result of the bankruptcy should put the company in a very good position to become cost-competitive.  Risks to GM include the company’s pension funds, which are still very underfunded, and the ability to increase its U.S. sales.  Most American consumers don’t realize it, but about 72% of GM’s sales volume comes from outside of the U.S. 

In terms of valuation, GM trades at only 8.7 times the consensus for FY 2012 earnings to be reported in February.  GM is expected to grow earnings considerably over the next several years, to $3.86 and $4.85 in 2013 and 2014, respectively, meaning that the stock trades at only 7.36 times forward earnings and an unbelievably cheap 5.86 times 2014’s earnings.

With no significant debt coming due until 2015 and with over $38 billion in liquidity available, GM seems very undervalued at current levels.  A good case can be made for any of these companies, but as the American automakers have been saying, “For the best value, buy American!”


KWMatt82 has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors Company. 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!

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