Picking a Winning Stock in the Automotive Industry

By Tyler Crowe - August 27, 2012 | Tickers: F, GM, HMC, TM | 0 Comments

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The automotive industry has been on a bit of a roller coaster as of late.  The high levels of uncertainty have left several investors anxious about any investment in this sector.  Last year’s earthquake and tsunami in Japan is just another example of a factor that can totally disrupt the industry and leave you wondering what happened to your investment.

Recently, there have been some trends that appear to make the automotive industry more attractive.  To help really put this into perspective, let’s sift through the numbers so we can make some conclusions about the underlying trends of the industry. I'll also be giving my opinion on what will be a solid pick in this sector that won’t have you looking for your ulcer medication.

The Market Trends: Big in Japan

As many of you remember, the earthquake, tsunami, and Fukushima Daiichi plant disaster brought the supply chain for the big Japanese car makers to their knees.  The results translated into a huge drop off in sales.  Toyota Motor Company (NYSE: TM) had to relinquish its crown as highest selling global automotive manufacturer to General Motors (NYSE: GM).  Toyota is on track to reclaim its crown, and other Japanese car makers are showing signs of health as well. Honda Motor Company (NYSE: HMC) has not only seen an 18% increase in its year to date sales for this year in the US, but it has also seen a doubling in its Chinese market sales.  These are very encouraging signs that show many of the Japanese car makers have left some of the woes of the earthquake and tsunami disasters behind.

Source: WSJ online

While part of the increase in demand for many of the Japanese automakers can be attributed to the clearing up of tsunami-related problems, another factor is the trend in consumer demand.  The four largest growing auto classes are small and mid-size cars, small SUVs, and minivans.  These sectors are right in the wheelhouse for the Japanese companies and their flagship products.

By raw numbers, both GM and Ford Motor Company (NYSE: F) are still the highest selling in the US, but their growth rates-- at 2.7% and 5%, respectively -- are well below the overall automotive sales rate which is at a healthy 14%

Now let’s take a quick look at some of the metrics for these four companies and see if it can help to make sense for a investment pickup

It should be noted that the numbers for Ford are skewed because during the fiscal year they had a $12 billion one time boost in income from tax deferments.  This threw off their metrics which will most certainly come back to earth after this year's fourth quarter report.

The Pick

Based on the market trends, it appears that there is something to be said for the companies that will have a good play in the smaller vehicle market.  This leads me to believe that the best pick in this space is Honda Motor Company.  What attracts me to the pick right now is that you can get a slightly higher dividend yield than Toyota.  At the same time, they are trading a couple points lower on the P/E ratio, which could indicate a little more bang for your buck.  I am a little scared of the American manufacturers right now because they just don't seem to have as suitable answer to the market demands. Also, their slowing growth numbers and shrinking revenue on a year over year basis are a little concerning.

There are two pitfalls for Honda. 1.) If the Japanese market takes a sharp decline when the current Japanese government subsidies to purchase new cars dries up, and 2.) If there is a noticeable trend back towards larger vehicles like large SUVs and trucks.  Keep a sharp eye out for these two factors going forward.

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