Are these Auto Industry Big Daddies in Trouble?

By Palwasha Saaim - July 10, 2012 | Tickers: F, GM, HMC, TM | 0 Comments

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Hallelujah! Good News, folks! Gasoline prices are further down this month from their $4/gallon high, setting a record of down movement for the 13th consecutive week and moving slowly towards $3. While some say this is only a short lived tactic to pump up Obama’s re-election campaign, others identify the cause to be the decreasing demand of consumers who bought less gasoline this year than for the same period last year. But whichever side you’re on, we all agree that this is good news (unless you were short a put option).

While this has been a sigh of relief for us, the consumers, it also bodes well for the automakers across the table. General Motors Co. (NYSE: GM) was able to beat analysts’ expectations of a 7.6% increase by selling 16% higher than last month. Sales for Ford Motor Co. (NYSE: F) were up 7.1% against analysts’ expectations of only 3.7%. Honda Motor Co. Ltd. (NYSE: HMC) and Toyota Motor Co. (NYSE: TM)  saw sales increases of 49% and 60% respectively, only slightly missing out analysts’ estimate of 51% and 66% respectively.

Additionally, as of June, General Motors leads the market with a 19.3% market share, followed by Ford Motor Co. with a 16.1% share. Toyota Motors and Honda Motors have a US market share of 13.8% and 9.7% respectively.

A quick look at their P/E ratios shows us that GM and Ford are trading close to their 52 week lows and at much lower P/E multiples than their foreign peers. Ford is trading at only 2 times its earnings, while General Motors is trading at 6 times its earnings, against Toyota and Honda trading at 35x and 23x their earnings respectively.

Like the figures so far, eh? Want to try your luck with the Big Daddies of the US auto world? Hold your horses, Sires! There’s more to the story.

Minefield Ahead!

What raised my concerns was a piece by Fool John Rosevear last week in which he mentioned some factors that may adversely affect the US auto industry in the coming years. You can read it here. In order to put my curiosity to rest, I looked at some other metrics, which only substantiated the points he raised.

• First up, I plotted the trend of sales revenue of both companies as a percentage of the total sales revenue of the US automobile industry.

While the sales revenue of the overall industry has increased over the years in absolute terms and so have the sales revenues of both motor companies, their revenues as a percentage of industry revenues have actually decreased over the same period. 

• Secondly, if you’re a long term investor, you naturally want to invest in a company with a good dividend yield. But guess what? Neither company has a good dividend yield (in fact, no yield at all). General Motors has had a zero dividend payout ratio for over five years now. Ford Motor Co. only resumed dividends this year. Previously, it hadn’t paid dividends since 2006.

• Thirdly, although both GM and Ford presently hold the biggest market shares, they have actually lost market share over a decade to Toyota and Honda. The only time the two companies were able to control losing their share was the time when Toyota and Honda saw their market shares falling. And there’s a valid justification for it. This was the period when the two Japanese companies suffered losses at the hands of nature during the great tsunami in Japan. 

• With the rise in EVs and hybrid cars, Ford and GM have also come out with their versions of Electric Vehicles. However, the year to date sales increase of the Toyota Prius hybrid by 90.4% remains unbeatable by either of the two US home-grown companies. Ford Focus and its EV version saw a year to date increase of 34.1%. Chevrolet Equinox and Malibu’s sales jointly increased for this year by 30.9%. Amongst the top 20 cars sold this year in the US, Toyota and Honda cars topped the ranks.

• Another key demographic trend that draws attention is the increase in the number of women drivers. However, both Ford and GM remain unfortunate by not having any favorite cars for women in their portfolio. The top ten most purchased cars by women include models from Volvo, Nissan, Volkswagen and even Honda and Toyota, but none from Ford and GM.

Moreover, news has been making rounds about Ford and General Motors’ sky rocketing pension liabilities. Both companies also have high fixed costs. In particular, Ford announced three months ago that it will be expanding in the Chinese market to increase its market share in Asia. The proposed factory expansion will be the largest in 5 decades. Ford’s CFO, Bob Shanks, has indicated in advance that the second quarter may be hit by high costs of expansion and new launches. General Motors on the other hand is facing trouble in its European operations, cutting jobs and closing down plants.

With trouble in foreign operations, foreign competitors like Honda and Toyota fast eroding their market shares in their Home country, zero or low dividend payouts, high costs of operations and demographics not in their favor, Ford and General Motors both appear to me as weak investments to buy right now. Those already holding the stock may continue to hold (and leave the rest on God or their lucky charms). 

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