Big Auto: How Bad is it Really?

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

You've heard these names before. You know the biggest auto companies that still turn something resembling a profit, and there's a good chance you drive a car one of these companies makes. But the auto industry has gotten very little love from the press or the public lately. To hear some people talk, you'd almost think the devil himself was running some of these companies. But it couldn't be that bad, could it? Let's check out these companies objectively and see how they're doing under the hood.

A Pleasant Surprise

Ford (NYSE: F) is the second-largest auto manufacturer in the country and fifth largest in the world. It currently holds the position of the largest American auto company that turns a reasonably consistent profit, and that 13.4% profit margin is surprisingly robust. Sporting a 2.1 price/book ratio, the production capacity of this company is unbelievable; that's something like $18 billion worth of production equipment and unsold autos consigned to dealerships. On top of it all, the P/E ratio is an exceptionally low 2.38, which I say makes Ford a potential diamond in the rough. While I haven't read the reviews of their 2013 line, if it's any good the company should be a pretty awesome buy. Naturally, do your own research; as for me, I'm definitely going to read the annual report to see CEO Alan Mulally's full plan.

A Very Solid Contender

Honda (NYSE: HMC) is a powerhouse. Nearly on par with Ford and growing quickly, Honda is known for producing both cars and motorcycles (uncontested champion in the second category since 1959). Honda also produces engines, and was the first Japanese auto company to create a luxury brand, which says something about this company's drive to succeed. I love the 1.0 price/book ratio, which basically says you could scrap the company and still get back your money even if it failed. But while the profit margins are a bit slim at 3.7%, the diverse nature of the business says it's got some staying power. Just producing engines alone could keep Honda going the way Sega kept making software when it could no longer compete with its hardware. I also like the 3.1% dividend yield, which tells me the company is confident in its ability to keep pumping out profits. Not to mention the fact that Honda is about as international as you can get, which makes for a nice broad base.

Cute Name, Serious Business

Tata Motors (NYSE: TTM) is the smallest of this group and a bit of an upstart. While it hasn't got the size the other companies on this list do, it's got the built-in advantages of being based in India: having easy access to three major continents (I'm particularly excited about the potential as African infrastructure begins to catch up) and a massive potential labor force who are just beginning to hit their stride on the car-buying front. I also love that Tata has branched out from its core car-production business and formed strategic partnerships with Hitchi, Telcon, and Marcopolo S.A. to produce construction equipment and buses. I like that Tata hasn't yet begun to pay a dividend, which to my mind says that the company is still working to grow swiftly. So the 2.5 price/book is justified at the moment and the 6.31 P/E seems like a pretty good deal, even if growth slows a bit from time to time. The profit margins of 7.6% could be better, but I still like Tata.

A Force to be Reckoned With

Toyota (NYSE: TM) is the goliath of the auto industry. Employing more than 300,000 people, it's the 11th largest company in the world by its revenue and still maintains a 3.5% profit margin. The 13.6 P/E ratio is pretty nice considering the relative safety of the well-positioned Toyota brands (Scion and Lexus are among those Americans would recognize).

How I'd Build an Auto Portfolio

First off, I'd never build an entire portfolio on a single sector; I already did that with REITs in 2008. But I'd consider Honda and Tata as two very worthy contenders for a portfolio devoted to security and growth potential. I'd even consider Ford if further research told me its act was together in a permanent sense, and I may even lay down some money on it as a wild card. The US government has already shown the lengths it'll go to for big companies, and at such a low P/E ratio the company looks like it might be a steal. Remember to do your research.

pongun has no positions in the stocks mentioned above. The Motley Fool owns shares of Ford. Motley Fool newsletter services recommend 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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