Taking A Look At The US Auto Industry

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

The US auto industry has already recovered from its 2009 near death experience, and many great investors - such as David Einhorn - are going long in the industry. As a matter of fact, 3Q results came in considerably better than expected for almost all automotive companies within the US. Better yet, the best is still ahead.

In this article I will take a quick review of the US' main players, Ford (NYSE: F) and General Motors (NYSE: GM). It's clear to me that they are a long opportunity against some strong foreign players such as Toyota (NYSE: TM). The reason is as simple as it could possibly be: even after having rallied from their 2009 lows, US companies still trade at a significant discount to peers with strong US operations.

In the case of Ford, the company has been led by whom I consider a great manager (Mr. Alan Mullaly), but the stock has strongly under performed the S&P 500 since January 2011 (by nearly 30%). Recently, F reported 3Q results which were above expectations (although Europe performed even worse than expected). After two years of under performance, 2013 might finally be Ford's year. The company is well positioned in the near term to deliver some positive earnings momentum thanks to strong pricing and volume growth in its US portfolio (mainly through the new Escape and Fusion vehicles).

Overall, F is fair to bet on the 2013/2014 continued industry recovery, since its a very well managed company and still trades at conservative multiples. Even after having gone up by over 26% in one month, F trades at 2013 5x EV/EBITDA and 9.6x P/E. Not bad for an enterprise with almost $12 billion in net cash. Besides, you will be able to enjoy a small but growing dividend.

General Motors, being a higher beta investment, could offer much higher upside potential than F. The company not only trades at lower multiples than Ford, but it also has more triggers coming ahead to call for investor's attention. For example, last December GM made some use of its massive cash hoard (the company held over $20 billion in net cash) and made the offer to buy back as much as $5.5 billion of its stock (200 million shares at $27.50).

But the surprises will not stop there, and its reasonable to expect that GM may participate in further buybacks, as the Treasury has indicated it intends to fully exit its GM stake this year. Generating over $3 billion in free cash flow and trading at 2013 2.2x EV/EBITDA and 8.4x P/E, I think GM is the way to go and an excellent option if you are considering making a bet in the auto industry. Its not easy to find cheap companies with such a good market positioning.

Before investing in the auto industry remember that revenues and margins can differ aggressively from one year to the other. It makes sense to grab a strong and wide industry recovery, but beware of the risks that lay ahead. My recommendation would be to go long on Ford or GM and stay away from fairly priced big foreign manufacturers such as Toyota, which trades at 2013 7x EV/EBITDA and 14x P/E. As you can probably tell I am convinced GM represents a much more sizable opportunity than Ford. If I would be considering to include an automobile manufacturer into my portfolio, I would just buy GM.    

martinzaldua 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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