3 Japanese Brands Making Big Moves in the Auto Industry
Victor is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Setting aside national pride and eternal discussions about which car brand is the best, Japanese automakers are acknowledged worldwide for their quality, durable vehicles. However are these companies worthy investments? Below, I will look at Toyota Motor (NYSE: TM), Honda Motor (NYSE: HMC), and Nissan Motor (NASDAQOTH: NSANY.PK) in order to figure out if they stand as attractive opportunities for long-term investors.
Any list of Japanese automakers must start with Toyota, the biggest in the industry, not only locally, but also globally. Having endured the last crisis and the Great Japan Earthquake, the company seems to be recuperating slowly. Over the last year, the firm has benefited from a favorable exchange rate, increased production volume and unit sales, and global efforts to reduce costs.
The company’s main competitive advantage stems from its manufacturing expertise. Focus has been put on quality and design over the last few years, even creating region-specific vehicles. However, prices can remain low due to the lower social security expenses faced by the company compared to the Detroit Three (Ford, General Motors, and Chrysler).
The other great advantage the company holds is its brand name. Respected among traditional car buyers for its quality, Toyota has also become the leading company in hybrid car makers. Going forward, this last segment is expected to drive profits and growth.
Emerging markets are also to contribute with plenty of growth in the years ahead. Asia in general, and China, India, and Indonesia (plus Brazil) in particular, provide considerable space for expansion in markets with above-average GDP growth expected going forward.
In fact, analysts expect Toyota to deliver an average annual EPS growth rate of about 45%, tripling the industry average estimates. So, trading at only a 50% premium to the industry average at 23 times its earnings, this stock still looks like a buy to me. Upside potential looks great and dividends and stock repurchases aren't scarce either.
Americans also buy Japanese cars…
Honda is the other really famous Japanese car maker. With growing demand in the U.S. and a weak yen in relation to the U.S. dollar, the company seems poised to grow. In fact, management expects to reach record sales in the U.S. over the next few quarters, mainly on the back of four very popular car models. Although the brand has enjoyed of wide recognition for its quality for a while now, going forward, sales will probably be driven by one specific characteristic in Honda´s vehicles: fuel efficiency. Actually, the firm´s CEO assures that the company will have the number-one fuel economy rating in each vehicle category by 2015.
Honda's constant focus on innovation keeps its vehicles desirable. This reflects on its results for FY 2013. Revenue rose 25% and earnings 33%, mainly driven by stronger sales in the automotive sector, principally in the U.S. As a result, its cash position also ameliorated, and the projected dividend yield surpasses 2%. Moreover, the firm´s gross margins are well above its peers, meaning that it gets to keep a larger amount of money for every sale.
Other markets, like India, and the motorcycle segment provide plenty of growth opportunities. Same can be said about the falling Yen. Consequently, analysts expect Honda to deliver an average annual EPS growth rate in the 26%-31% range, double of the industry average. Meanwhile, its valuation at 17.5 times its earnings looks pretty attractive. I´d say buy and hold; you will probably not regret it.
The upcoming one
Nissan is third in my list. Maybe not as well-known as Honda and Toyota in the past, it has become a very popular and acknowledged brand over the past few years. The recent alliance with Renault has allowed both firms to enjoy scale advantages and leverage over providers, while sharing technology and vehicle platforms.
For instance, “the launch of several all-electric vehicles by both Nissan and Renault demonstrates the alliance's ability to jointly develop and bring to market a significant, game-changing product while taking advantage of scale to reduce investment in the project.” (Morningstar) Moreover, the alliance has helped the firm better navigate the post-earthquake period, losing less production capacity than its competitors.
Producing all-electric vehicles places Nissan in an advantageous position. The product has the potential to not only attract ever-increasing customers, but also government support. Emerging markets, especially India and Russia, provide further opportunities for expansion, and acquisitions have played a very important role in the firm’s penetration in these countries.
The U.S. market remains strong, as well. With the Yen depreciating and Nissan’s electric cars much cheaper, recent results portray an encouraging outlook. Demand is also strengthening in China, providing further space for development.
Despite some promising prospects and growth catalysts, analysts expect Nissan to under-perform its peers in terms of EPS growth, delivering an annual rate in the 10%-13% range over the next five years. However, being undervalued in relation to its peers, trading at 13.7 times its earnings, I’d recommend buying and holding on to this stock for the long-term.
Lower social security expenses coupled with a weak Yen provide plenty of growth opportunities for these well-known brands. Although all three offer compelling outlook for the years to come and I would recommend adding all of these shares to your long-term portfolio, my number-one choice would be Toyota for its potential and scale. Don’t miss out; Japanese cars will most likely be gaining market share in several big markets over the next few years.
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