U.S. to Japan: "Put Up Your Dukes"

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

The Detroit Auto Show features bright lights, new models, optimistic perspectives, and lots of pictures. But after the dust settles and the energy fades, a few manufacturers will stand above the rest.

After recovering from the infamous earthquake and tsunami that rocked Japan in 2011, Toyota Motors (NYSE: TM) regained its position as the largest automobile manufacturer in the world, overcoming General Motors (NYSE: GM).

Actually, Japanese automakers Toyota and Honda (NYSE: HMC) may be poised for long term growth. For example, given the decline of the yen against other currencies, Japan’s global operations and sales should benefit from exports. However, investors must recognize that because China is the largest auto market in the world—and since many cars are produced in China—foreign exchange rates likely won’t have as large an impact as some analysts may expect.

Regardless, the automotive industry remains increasingly competitive.

Company Comparison

The following financial ratios and data are generated by Forbes from company financial statements ending in the third quarter of 2012. I will focus mostly on earnings, cash flow, and debt.

Earnings

Given the P/E ratio, investors interested in Japanese automakers should anticipate a higher earnings growth potential. In fact, Toyota and Honda have posted consistently higher P/E ratios over the past 5 years compared to their American counterparts Ford (NYSE: F) and General Motors. Those that dislike net earnings or believe that “cash is king” can use the Price/Cash Flow ratio to see the potential long-term health of the automakers.

Cash Flow

Theoretically, the lower the Price/Cash Flow Ratio the greater the value of the stock. However, it is important to recognize that Ford and General Motors’ ratios are smaller because of the cash flow generated from each company’s unique circumstance.

Specifically, Ford’s Asset/Equity ratio is high because of the large sums of cash generated by the debt and subsequent leverage Ford assumes to grow and operate. General Motors’ ratio is high because the firm recently erupted from Chapter 11 Bankruptcy and is holding large sums of cash, cash equivalents, and marketable securities on its balance sheet. The Japanese companies do not seem to be anomalies. Actually, their ratios are actually amazingly similar.

Debt

Ford clearly owns massive amounts of debt and is heavily leveraged compared to the other manufacturers. As a result, some analysts may deem Ford as an extremely risky investment compared to the other companies. It is dependent on outside funds for growth. But, General Motors was in a similar position—until it was bailed out by the United States government. While Honda displays a better Debt/Equity Ratio than Toyota, each company’s ratio is more orthodox their American competitors—perhaps leaving some investors at ease.

(Note: GM had a tangible book value per share of -$3.86, inferring that shareholders would not receive any money if all assets were sold and the company was to go bankrupt)

Chinese Plan of Attack

Just in China, Toyota is expecting to increase sales 7.1% in 2013 while Honda is expecting a 25% increase in sales. Ford and General Motors are preparing for a long term battle. By third quarter's end in 2012, Ford’s market share in China reached a new high. Now, Ford is continuing to invest heavily in the Chinese market by building new plants, for example. General Motors already has a massive presence in China. The nation is the company’s second largest market, only to North America.

As Ford and General Motors continue production, some analysts proclaim that Toyota and Honda will not gain the advantage in China they expect, even if the Japanese companies achieve their forecasted sales.

Conclusion

The brief indicators in this analysis only show a glimpse of the battle between the world’s largest automobile manufacturers. However, the result remains: American companies must increase their game if they want to compete with the big boys in China. And, as of late, they seem to be putting up quite a fight.

 


marascobn1 has no position in any stocks mentioned. 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!

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