Are Cars a Good Investment Again?

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

Editor's Note: This article has been amended to correctly identify GM's product line.

I'm not old enough to remember it, and I'm not young, but there was a time when investing in automobile manufacturers was the safest, most predictable thing one could do.

Been a while, isn't it? That time is one with the dinosaurs, the Corvair and possibly honest members of congress. Still, despite all the travails the car companies have had, America – and much of the world – still runs on automobiles. At this point, entire cities are built around the idea of freely available cars and that people will use them for their generalized transportation needs.

Which is why the news this week that all of the major car companies reported strong growth in sales – most in double digits – from the same time last year is great news. Sales growth, year-over-year, for a major industry is a great sign for a growing economy and consumer – and business confidence. This is the sort of news that begins to feed on itself and leads to more good news. It's possibly the best sign we could have.

And auto companies are still undervalued, by my reckoning. Check out these P/E numbers:

F PE Ratio TTM data by YCharts

Winners in the U.S.A … mostly

Ford (NYSE: F)

Sales Growth 12-Month Growth P/E EPS Dividend Yield
18% 15.34% 9.39 1.42 2.99%

Ford leads the pack in terms of sales year-over-year. Combine that with solid growth and a decent dividend and it looks eminently investment worthy. Both the newer Ford Fusion and Escape set sales records and so did the relaunched Lincoln MKZ. Heck, the F-Series truck sales grew 24%! Given its newly reported sales figures and the share growth of the last six months, I'd say the time to buy is now. Yes, there were some lean years, but the economic conditions are right for Ford to come back in a good way.

General Motors (NYSE: GM)

Sales Growth 12-Month Growth P/E EPS Dividend Yield
11% 28.26% 10.33 2.92 n/a

General Motors – once the world's largest company – had a harder time during the great recession. However, shares in GM have been on the move upward most of the year and this news won't slow them down. Only the lack of confidence by not offering a dividend makes me rate GM lower than Ford.

Honda (NYSE: HMC)

Sales Growth 12-Month Growth P/E EPS Dividend Yield
7% 7.28% 18.74 2.09 2.21%

Not all the good news was from American automakers. Honda did pretty well, with it's CR-V climbing the sales ladder. Again, that's a small vehicle, but not as small as some. Honda's been a rough investment to hold over the last twelve months as the shares haven't kept pace with the S&P or the Dow. Still, there might be something worth hitting, there. I just think you'd be better off in one of the other two. But if – for some reason – you want to avoid them, Honda makes a good back up.

Not all good news

Toyota (NYSE: TM)

Sales Growth 12-Month Growth P/E EPS Dividend Yield
-1% 38.19% 22.80 4.99 1.31%

As one of only two major car companies to not see sales growth – the other was Volkswagen –Toyota looks particularly bad in comparison. It's true that the firm has had some bad PR lately, with several safety-oriented recalls making a lot of news, but still a lot of the raw numbers look good. EPS is good, 12-Month Growth is good. However, the growth has made the P/E for Toyota look sort of wonky compared to the others on the list. I think Toyota is slightly overvalued right now and it would be worth your time to avoid buying it. If you're in, it's time to sell and take what profit you can.

Cruising down the road...

Car companies aren't something one has in a portfolio for sudden and explosive growth. These are mature firms in a well-developed industry. If you're thinking about investing in any of these – and my top recco is Ford – it should be with the thought that you want some large-scale manufacturing firms in your portfolio. They won't be a main driver, but every portfolio needs solid, reliable growers to form the basis of it all. That's why you should put some auto in your tank.

Good luck!

Follow Nate on Twitter: @natewooley

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Nate Wooley 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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