Decisions, Decisions: Ford, Honda or GM
Tim is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Let’s assume for a moment you – like many – feel pretty good about the prospects for automakers for the balance of this year, and even into next. And why not, there’s a lot to like. Setting Europe in general and Spain in particular aside for a moment, most domestic indicators point to a great year for car sales. Consumer confidence is improving right along with spending, the employment situation – while still a bit bumpy – is getting stronger and the half-full types are of the mind even housing is ready for a turnaround.
Now we add Honda’s (NYSE: HMC) and Ford’s (NYSE: F) recently announced sales and earnings for Q4 and Q1, respectively, into the mix – GM (NYSE: GM) will announce earnings next week – and conditions look pretty good. Not ideal – the aforementioned European debacle is stemming the tide a bit and Asian markets aren't helping – but the good outweighs the bad and provides investors with several opportunities. It’s a nice problem to have of course, but what’s an investor to do? Let’s take a look at each.
When Honda management announced Q4 earnings results a full 60% higher than the year-ago period, you’d have thunk investors would have jumped all over that – not as much as the results might indicate – at least, not yet. What was nice to see was the company's gains from both the automotive and motorcycle units – with gas prices being what they are that’s likely to continue. And for much the same reasons operating income more than doubled, up over 142% - and that’s taking into account a not-so-favorable foreign exchange rate. Not bad.
At first glance Honda may appear a bit steep relative to Ford and GM, and by some measures they are. With the slight run-up after the open, Honda’s trading about 28½ times earnings – that’s more than 3 to 5 times that of Ford and GM, respectively. But Honda’s management team is top-drawer as evidenced by some of the highest operating margins in the industry, and their return on equity and price-to-sales are right in line.
Ford’s recently announced earnings takes a bit more work to get to the bottom of what was a mixed quarter. All in all, $1.4 billion in profit in Q1 is nothing to sneeze at, and becomes even more impressive when you take into account results from overseas. Unfortunately – due to higher taxes, 60,000 fewer vehicles shipped to European markets and a nearly $150 million pre-tax loss vs. a $293 million gain overseas last year – the $2.1 billion pre-tax profit in North America (up nearly $290 from the year-ago period) took a sizable hit.
Also less than ideal – with many of the same factors to blame for the earnings drop – revenue decreased from just over $33 billion in Q1 of 2011 to $32.4 billion this past quarter. That'll put a damper on investor enthusiasm, as we've already seen today.
GM Chief Executive Dan Akerson is complaining about his $7.7 million in total compensation for 2011 – as well as those of other senior managers – saying it’s hard to attract and keep good talent with the government-imposed limitations on compensation. Of course, that’s easy to say now the company is doing well – and they are, coming off the best year ever earnings-wise – but with a 30% ownership stake the Treasury can and does get to make the rules.
But make no mistake Mr. Akerson was worth every dime, and maybe even more. Especially when you consider nearly $6 million of it was tied to options – in other words, performance and returning shareholder value. Nice.
Next week’s earnings announcement is generally expected to mirror Ford’s – overall a profit based almost entirely on domestic sales. So let’s assume that’s the case – where does that leave GM? The same place they’ve been for months now, one of the best values in the industry, particularly when (not if) they get a handle on expenses and bump up what are now anemic margins relative to others.
Three pretty solid investment choices, but the question remains – what’s an investor to do? You won’t go wrong with any of these alternatives, and Honda’s 2.11% dividend yield is the biggest of the bunch – Ford pays its shareholders about 1.68% and GM’s dividend will just have to wait. Ford has been – and continues to be – the best mid-term investment option of the three for a few reasons. Nicely undervalued, a solid if not outstanding dividend and as European and Asian markets slowly improve Ford stands to gain big time. GM comes in a close second and in this instance, even third place Honda is at least on the medal stand.
The investment opinions included are just that, opinions. Investing involves risk, as you well know, so consider your decisions wisely. Tim holds no position in the securities mentioned in this article.