In this article, we will look at four of the top automobile manufacturers in the world: Ford Motor Company (F), Toyota Motor Corp. (TM), Honda Motor Co. (HMC), and Daimler AG (DDAIF.PK). The intent is to use both past performance measures and growth estimates to determine potentially profitable investments. In addition, we will look at some macroeconomic concerns and technological advances of each of the companies.
Here are the four automakers for our analysis:
5 Year Growth Forecast
Upside Potential to Reach a Fair Stock Value
Data from Morningstar on January 2, 2013
The discounted earnings plus equity model, developed by EFS Investment Partners and applied to the four competitors, suggests the following: currently two stocks (Ford and Toyota) are well undervalued. In addition, EFS's fair stock price valuation indicates that Ford stock is trading at a considerable discount.
Potential Catalysts for the Auto Industry in 2013
In general, concerns about slowing global economic growth have plagued the auto industry to varying degrees over the last few years. While demand in the U.S. and China has been fairly robust in 2012, signs of slowing growth in China have hurt. U.S. auto sales for 2012 are expected to show the best numbers since 2007.
Outside the U.S., the picture is bleaker. While demand in China has slowed, it is the European market that has hurt the most. Concerns over how the U.S. will handle its own debt crisis could bloom into a positive catalyst with adoption of a meaningful long-term plan. Improvement in economic conditions in China and especially in Europe could act to boost the share price of auto manufacturers significantly.
Ford Motor Company is the smallest company in our table. Ford gets about 59% of its revenue from its 16% share of the U.S. market. Europe accounts for 26% of revenue with 8% market share. Ford has the most attractive trailing valuation metrics of any stock on the table, with a P/E of a miniscule 3.0 and a P/S well under 1.0. Of greatest concern to investors is the company's outsized debt-to-equity ratio.
However, one needs to remember Ford was the only U.S. automaker to avoid bankruptcy and eliminate existing debt. To survive, the company opened a huge credit facility, which they are successfully paying down. In addition, the company has invested heavily in technological advances with its line of EcoBoost engines and increased production capacity in Europe. In March of 2012, the company's debt-to-equity ratio stood at 6.6 compared to today's 3.8. Credit agencies appear comfortable with Ford's debt as Moody's upgraded Ford's credit rating to investment grade in May of 2012.
Ford is betting big on introducing more EcoBoost engines into its vehicles. A company press release highlights the 2013 release of a 1.0-liter EcoBoost® engine in a Ford Fiesta. According to Ford, this award-winning engine will have the best fuel economy of any non-hybrid car sold in the U.S.
Honda Motor Company has impressive forward-looking valuations, with a Forward P/E of 11.65 and a PEG of 0.4 to go along with a healthy five-year growth forecast of 21.2%. Honda is the most diversified of the companies. The company manufactures a variety of engine related products like motorcycles, generators, lawnmowers, and boat motors. Few investors know Honda also makes robots and jets for private and corporate customers. Automobiles account for 70% of the company's revenues with motorcycles bringing in 17%.
Edmunds.com ranks Honda in 5th place in its 2012 U.S. market share forecast with 9.8% of the market. That's a drop of 0.4% from 2011. General Motors (GM) has the largest U.S. market share at 17.5%, followed by Ford with 15.6%, Toyota at 14.8%, and Chrysler Group at 10.9%.
Toyota Motors has seen its share of troubles in the last few years, from the gas pedal accelerator controversy to the March 2011 earthquake. The final legal settlements were announced on December 26, 2012 with Toyota agreeing to pay out $1.1 billion to consumers affected by the acceleration problem. This will hurt the bottom line a bit next year.
However, Toyota is expected to retake the title of world's largest automaker over the reigning champion, General Motors. Toyota's Forward P/E is 11.56 but the company has the highest 5-year growth forecast of 39.8%. On December 26, 2012, the company announced it expects global sales to increase by 2% in 2013.
Daimler AG has perhaps the strongest luxury automobile brand on the planet with its Mercedes Benz line. For income investors, Daimler's dividend yield of 3.87% is more than three times the industry average. Although interrupted by the financial crisis, the company has a history of high yields, with a lofty year-end yield of 8.69% for 2008. Yield dropped to a still respectable 1.48% in 2009. There was no dividend in 2010 but for 2011, the yield was up to 4.48%. For growth investors, Daimler falls short of its peers with a PEG of 2.0 and the lowest 5 year growth forecast of 3.4%.
Final Verdict - Watch the Technology
In truth, any of these companies would be potentially profitable investments. All pay respectable dividends, with Daimler as the standout. All have solid growth prospects. All have brand identification.
However, technological innovation with the traditional internal combustion engine may lead to a few better prospects. Fuel efficiency is a growing concern amongst consumers. The choice of hybrid or electric vehicles is not a cost effective option for many. Technology often manages to find a way. Today more and more manufacturers are producing traditional engines with superior fuel efficiency at a much lower cost compared to hybrids of EVs. The technology is gasoline direct injection, or GDI, which "turbo" injects gasoline to the powertrain in a highly efficient way.
WardsAuto is a leading source of research and information for the world's automobile industry. Every year it publishes a list of the top ten engines. Most manufacturers are moving in the direction of lighter engines with direct injection, but Ford Motor has consistently had more winners over the past 5 years than any of the leading global manufacturers in our table. Moreover, Ford's stock valuation is the best option to be a buy for now.
As we embark on a new trading year, you will be reading many articles on the "best stocks for 2013." One of the first to appear in the featured picks and at the top of the list from analysts at Bank of America-Merrill Lynch was Ford.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.