By Matt Doiron
Ford Motor Company's (F) U.S. sales were up only slightly in December 2012 from December 2011, with higher car sales offsetting a decline in light trucks. Market share came in at 15.7%, about even with its share for the year as a whole, down slightly from 16.8% share a year earlier. In the third quarter of the year, revenue was down slightly with Europe and South American operations leading the decline. However, the company was able to cut costs more or less in line with lower sales and so earnings were essentially flat. Ford recorded 41 cents per share for the quarter.
After a few years of poor performance, the auto ecosystem -- including the automakers themselves, auto parts companies, and other related businesses -- has been picking up interest as a source of value. In particular, many investors have argued that the U.S. consumer's auto fleet is aging and will need to be replaced soon. Ford is valued at 10 times consensus earnings for 2013, suggesting that the stock is either undervalued or that the company will see its net income decline over the next few years. It is possible that this could occur despite strong U.S. numbers, but we think that it would require very poor macro conditions in Europe. As a result, the case against buying Ford would seem to depend on weak performance in the U.S. We don't consider the fleet age argument to be a smoking gun, and of course Ford has been losing market share somewhat, but we do think that investors should be looking at auto-related companies -- and that includes the automakers. Ford also pays a dividend of close to 3% at current prices.
Billionaire David Tepper's Appaloosa Management liked Ford in the third quarter of 2012, increasing its holdings of the stock by 52% to nearly 12 million shares (see more stock picks from billionaire David Tepper here). Renaissance Technologies, whose success since inception has made founder Jim Simons a multi-billionaire, initiated a position of 7.7 million shares between July and September (find more stocks that Renaissance was buying here).
Ford's closest peer is General Motors (GM), which is a more popular stock in the hedge fund community; in fact, it made our list of the 10 most popular stocks among hedge funds in the third quarter of 2012 (click here for more stocks hedge funds love). GM had a slightly higher increase in U.S. sales in December than Ford did, but a poorer performance over the course of 2012 as a whole. It also trades at a discount to Ford in terms of 2013 earnings with a P/E of 8; however, earnings were 13% lower in Q3 2012 than a year earlier. As a result, it's tough to make a call between the two companies.
We can also compare Ford to Toyota Motor (TM), Honda Motor (HMC), and tire manufacturer The Goodyear Tire & Rubber Co. (GT). Honda and Toyota's net income has been up, but some of that -- likely most -- is due to the fact that a year ago the companies were still being impacted by the aftereffects of the Fukushima disaster. Still, we think that these companies are more dependable bets for investors and their premiums to Ford and GM are not that large -- their 2013 P/Es are 11 and 12, respectively, with five-year PEG ratios of 0.5 or lower. They might be better value investments. Goodyear is the cheapest of all going by analyst estimates, at six times expected earnings for this year, but the company does stand out for having particularly high pension obligations. Investors may be concerned by this as well as by the decline in revenue and earnings in the company's most recent quarterly report.
There are a number of cheap-looking stocks in the auto industry, including Ford and peer GM. However, we think that it might be worth paying slightly more (in terms of earnings multiples) for Honda or Toyota. We feel confident that their growth rates will outperform those at Ford and GM, so they might be more attractive investments.