Take a Drive With Ford Before it's Too Late
Paul is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The last several years have been rough for American automakers with the recession and the ensuing auto bailout. The most successful one was Ford (NYSE: F), which managed to both avoid bankruptcy and a bailout. However, it still struggled quite a bit. Now, though, the tide is looking up with Ford just posting its strongest monthly sales since before the recession.
Ford's May in America
Ford's U.S. sales grew by 14%, and retail sales grew by 17%. Escape sales were up by 26% and the Fusion by 10%. However, all of these successes were dwarfed by the sales of the F-Series, which were up 31% for the best May sales since 2005 with a total of over 70,000 sales. This is especially positive from an investment perspective because of the higher margins on trucks. As a result, Ford announced a third quarter production of 740,000 vehicles, up 10% from last year. Essentially, Ford had the strongest May since before the Recession and in doing so surpassed expectations.
Ford may be doing quite well in the United States, but it suffered a loss in Europe and South America. South America is not a significant concern because the decline here was primarily caused by unfavorable exchange rates, including the devaluation of the bolivar. As this changes, its results will likely pick up, and Ford still expects break-even (or at least almost break-even) results for the year. Ford should be able to handle the temporary drag just fine and should be restored to profitability soon.
Europe is a much larger issue for Ford because the losses are caused more by higher structural costs and the market is three times as large. Part of this is just because of the weak European economy. Thankfully, Ford's profits in America should be able to carry it through until Europe's economy recovers. Furthermore, Ford is moving quite rapidly in its reconstruction with the intent of replicating its success here. There is no reason to believe that it will not be able to do that, and if it does Ford should be able to attain its goal of a growing, profitable Ford Europe by the middle of the decade.
However, Europe and South America's importance is dwarfed by Asia-Pacific-Africa's. Here again the news is good. Ford was more profitable than it expected to be, and the reason it only expected break-even results was because it was investing so heavily in future growth. Its current market share is low, only about 3.6% in China, but this was about a percentage point higher than a year ago, and if it can continue to grow this rapidly, they will be able to grab a large amount of the potential growth in China. They also managed to improve their market share in Africa to 3%, again gaining about a percentage point in the last year.
Up until this time, Ford's stock price has been in line with some of the other major players in the industry. It has neither outpaced them nor lagged behind them.
Although, the outlook for the industry as a whole is looking up, many of its competitors are not in as strong a position. General Motors (NYSE: GM) had a quarterly profit of $.9 billion, which was lower than a year ago. Furthermore, it is moving much slower at restructuring in Europe than Ford is and is not even trying to increase its market share there. Furthermore, it has a higher P/E ratio, and so Ford is likely the better buy. It is larger in China and so might have more long-term potential though. On the negative side, it has not had any hugely successful cars like the Focus.
For example, the F-Series continues to outsell the Silverado. Toyota (NYSE: TM) also had a strong run. Its Europe division was actually profitable (as were all of its divisions), and its American division sold almost 600,000 more cars on a year-over-year basis. Some of this increase came because at this time last year it was still recovering from the fallout of the Fukushima Daiichi disaster, and that must be taken into account. However, it seems to be once again on a strong growth path, which one can see reflected in the growth of their stock over the last several months. In other words, Toyota is once again doing what it does best -- making and selling good cars.
Furthermore, it has a better reputation than Ford. As a result, it is likely also worth considering as a worthy addition to your portfolio. Honda (NYSE: HMC) has had the weakest stock growth. The reasons for this can be seen in its sales growth. Its worldwide vehicle sales have actually shrunk by 3.7% year-over-year so far this year. The strongest shrinkage was seen in China with 6.9%. This is particularly troubling because that is where the greatest potential for growth lies. Furthermore, like Toyota, Honda was dealing with the Fukushima Daiichi disaster a year ago, and so should be seeing strong growth now. In other words, a year or two ago one would expect Honda to be roaring along like Ford and Toyota are right now, but it's not. This raises significant questions about its long-term sustainability. The vehicle industry is just too competitive to long tolerate lackluster performance like Honda has been having recently.
Ford just had one of the most successful months in quite a long time in the United States, and its fortunes are looking up in the Asia-Pacific-Africa, and even Europe and South America. Furthermore, they are currently relatively cheap with a P/E of only 10.74. Furthermore, their dividend yield is a reasonable 2.6%. Thus, now may be a time to join all of the consumers and go for a ride with Ford. If it plays its cards right it should be able to deliver substantial growth over the next few years. Toyota is also worth looking into, and General Motors might be, but the savvy investor should tread cautiously before investing in Honda.
China is already the world's largest auto market – and it's set to grow even bigger in coming years. A recent Motley Fool report, "2 Automakers to Buy for a Surging Chinese Market", names two global giants poised to reap big gains that could drive big rewards for investors. You can read this report right now for free – just click here for instant access.
Paul Sangrey 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!