Top Auto Stocks to Consider Buying

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

The auto industry has been out of fashion during the last few years. This comes as no surprise, as a worldwide recession paralyzed auto sales, and two of the big American automakers had to be rescued by the government. Today, however, there are indicators that the auto industry is not only recovering, but is also poised to deliver good earnings in the next few years. In fact, the average car in America today is 11 years old. Only a few years ago, the cars were on average 8 years old. As the economy picks up, people will stop putting off the much needed car change, and should start buying new cars again. Even Europe, where the recession is still very much alive, should return to normal rates of car buying. And, in the emerging markets, there is hardly any doubt that demand for automobiles will continue to edge up. So, given the possibility of an improving economy worldwide, is it wise to invest in car stocks today?

General Motors (NYSE: GM): The poster-child of the bailout, even once dubbed Government Motors, has recovered fast. Coming a close second in auto sales, the company is in undeniably much better shape today.

  • With regards to valuation, the stock trades at a P/E of 10.44, which is low for an automaker. Forward P/E, however, is even lower, at 7.61x. When factoring in growth, however, GM has a PEG of 0.88, which is not as attractive as in some of its competitors.
  • Analysts are moderately bullish: the stock has a current mean recommendation of 2.00, and an average price target of $34.94. This target price implies a 25.86% potential upside from Friday's closing price.
  • It does not currently pay a dividend to its shareholders.
  • Recent earnings were mixed, mainly due to the terrible sales numbers in Europe. GM, however, is not the only automaker suffering from weak European results. While net income was about a third lower than in 2011, EBIT grew from $1.1B to $1.25B, and Q4 profitability increased 65%.
  • If GM is able to successfully launch the new products this year, they might be able to reclaim the spot as the world's largest automaker. Even if they do not pull that off, earnings should nonetheless improve over the next few years. With attractive valuations, and the possibility of a strong recovery story, investors should defintely keep an eye on GM when investing in the auto industry.

Toyota (NYSE: TM): Toyota is the other side of the story: The Japanese automaker has been able to conquer the coveted world leader spot in auto sales. Its stock has recovered fast from the financial crisis lows, and the company has an excellent record of strong earnings and sales growth.

  • Valuation-wise, the stock has a current P/E of 19.58, one of the highest in the industry. However, if one takes into account growth or earnings projections, the higher-than-average P/E might be justified: TM has a forward P/E of 12.51 and a PEG of 0.48 (some analysts even see a 5 year PEG of only 0.35).
  • Analysts do like the company: it has a mean recommendation of 1.00 (buy), and an average price target of $108.58. Compared to its competitors, however, the implied upside from current prices is lower (+5.83%), which would signal that the stock has already climbed so much that there might be less room to grow this year.
  • Unlike GM, Toyota pays a dividend of $1.36/share, which works out to a yield of 1.33%. The company has paid a dividend to its shareholders since 1993.
  • Recent earnings were good, with quarterly income rising 23%, even when taking into account settlement claims, recall problems, and the effects of natural disasters in Japan.

Ford (NYSE: F): The only one of the big American automakers that did not need government help in recent years, Ford has been hailed by many as the savior of the American auto industry. With strong earnings growth and superb management, Ford seems poised to continue to deliver.

  • Forward P/E is a very attractive 7.75. When taking growth into account, Ford is also a winner, as it has a PEG of only 0.28.
  • Analysts are neutral on the stock (mean recommendation of 2.50), and, in fact, the most recent analyst reports (Barclays, Deutsche, Standpoint) have downgraded the stock from buy/overweight to hold. However, the stock still has an average target price of $15.14, which implies a potential stock price upside of 16.28%.
  • Ford pays an attractive dividend of $.40/share, which works out to a yield of 3.2% (one of the highest in the industry). Even though it did not pay a dividend from 2007 to 2011, the company has otherwise paid a dividend to its shareholders since 1987.
  • Aside from the weak results in Europe, Ford's earnings are strong, and future estimates upbeat. If Ford continues to produce cars that people want to buy, the company's stock is poised to rise as the world economy continues to recover.
<table> <tbody> <tr> <td> </td> <td><strong>P/E</strong></td> <td><strong>Fwd P/E</strong></td> <td><strong>PEG</strong></td> <td><strong>Avg PT (% implied upside)</strong></td> <td><strong>Div Yield</strong></td> </tr> <tr> <td><strong>GM</strong></td> <td>10.44</td> <td>7.61</td> <td>0.88</td> <td>$34.94 (+25.86%)</td> <td>N/A</td> </tr> <tr> <td><strong>TM</strong></td> <td>19.58</td> <td>12.51</td> <td>0.48</td> <td>$108.58 (+5.83%)</td> <td>1.33%</td> </tr> <tr> <td><strong>F</strong></td> <td>2.95</td> <td>7.75</td> <td>0.28</td> <td>$15.14 (+16.28%)</td> <td>3.07%</td> </tr> <tr> <td><em>Edge</em></td> <td><em>F</em></td> <td><em>GM</em></td> <td><em>F</em></td> <td><em>GM</em></td> <td><em>F</em></td> </tr> </tbody> </table>

Bottom Line

All three companies look attractive. Toyota is probably the safest, most conservative bet, while GM and F are value plays that can be riskier, but also deliver higher rewards. At any rate, if the automobile industry continues to recover, all three stocks are poised to benefit, so investors should consider all three when investing in the auto industry, and pick the one that most suits their investment style.

wheckster 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!

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