The Recovery Everyone Can See Coming
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I don't know how much more data investors really need. I wrote about this last year, and the signs have only become clearer since then. The auto industry is undergoing a recovery that should last for several years. The pent up demand is huge, and the Great Recession cause many to rethink purchasing a new vehicle. However, just like death and taxes, some things are inevitable, and old cars don't run forever. One company poised to benefit from this upcoming recovery is Ford Motor (NYSE: F).
How Many Tips Do You Need?
When I wrote my last post, Experian reported there were 245 million vehicles in the U.S. with an average age of 11 years. In addition, 52 million of these vehicles were 16 years or older.
Investors can also look at the railroad industry to get a tip on the direction of auto sales. In their last earnings report, CSX saw a 15% increase in auto shipments. Norfolk Southern also said auto shipments were up, and Union Pacific saw a rise of 14% in automotive volumes.
In addition, you have analysts’ projections for growth at each of the major automotive manufacturers. Analysts expect both Toyota Motor (NYSE: TM) and Honda Motor (NYSE: HMC) to show big earnings growth as they reclaim lost market share. Specifically, Toyota is expected to grow earnings by over 40%, and Honda is expected to see near 30% growth. Ford and General Motors (NYSE: GM) have been gaining ground on their foreign competitors, so they aren't expected to see such explosive growth. However, with 12.5% growth expected from GM, and 10.5% growth at Ford, they won't do too badly either.
The Strength Of The Oval
If you look at Ford's recent quarterly earnings, you can see that in three of their four geographic regions they performed very well. In North America and South America the company saw 12.76% and 10.71% revenue growth respectively. In Asia Pacific and Africa, the company's 47.37% revenue growth was astounding. It's no surprise the problem region was Europe, showing revenue down 21.69%.
Ford did mention something interesting, that I think bodes well for the future of the company in Europe. They said that last year, Europe only sold 13.5 million vehicles, which was the lowest since 1995. When a geography has a 17 year low in units sold, you can assume if they aren't at the bottom of their cycle, they have to be pretty close. Automotive sales are cyclical in nature, so investors have to realize that buying when things are bleak is often the best way to profit.
There Is Always Room For Improvement
In addition, Ford has some opportunities to improve their performance even further. The company's automotive operating margin of 3.8% compares favorably to most of their competition. This margin was good enough to beat out Toyota's margin of 1.91% and Honda's margin of 2.94%. However, General Motors did better at 4.27%, and Ford had a wild variation in margin between different geographies.
An example of where Ford could do better is, in the difference in operating margin in North America at 8.4%, versus South America at 4.8%. In addition, the company's huge revenue growth in the Asia Pacific Africa division was overshadowed by their tiny 1.4% margin. It seems clear that Ford North America can teach the rest of the company about manufacturing efficiency. If Ford can improve their margins, the company's earnings growth could change dramatically.
What Ford Does Better
The good news for Ford shareholders is, their company is growing, and expects to take market share in key geographies going forward. Not only does the company see industry growth in the U.S. and China in 2013, but the company expects to gain market share in both regions. While Europe is expected to still be problematic, this is likely the trough of the cycle.
In addition, Ford has achieved two goals that were set out several years ago. The company's debt ratings have recovered, and with the recent dividend increase, the company's yield is a significant part of investors potential returns. In fact, Ford's stock yields over 3%, which outshines Honda at 2.6%, Toyota at 1.3%, and General Motors' non-existent dividend.
Some investors might prefer Toyota or Honda's huge potential growth as better investments. However, their market share recovery may not happen as quick as analysts expect. Ford and GM are not the whipping boys of the industry they used to be. Both companies have gotten leaner and more efficient, and are producing better quality products. While GM has the faster expected growth rate at 12.58%, their lack of a dividend is what makes Ford my pick. The company's yield of 3%, plus at least a 10.5% growth rate looks like a good value. With shares trading at just 9.3 times projected earnings, and positive signs in the auto industry all around, this is a recovery everyone can see coming.
MHenage 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!