General Motors (GM), Ford (F), and Toyota (TM), each posted incredible monthly auto sales reports for August. While sales have remained strong for the last several years, multi-year highs and bullish sentiment might point toward a strong end to 2013. But which, if any, of the major auto makers are a buy right now?
The World's largest grows larger
Toyota's August sales posted a 23% increase year over year, to 231,537 units shipped. By beating analysts' estimates of a 15% increase, the world's largest auto maker had its best month in more than five years.
Trucks lead the way
Ford beat August sales estimates of 10% with a 12.2% year-over-year rise in units sold. For the month, Ford shipped 221,270 units, which was led by another incredible performance from its truck division, up 18.4%. Sales of its popular F-series trucks in particular rose 22.2% year over year. Moreover, its popular Fusion sedan had its best August ever with 24,653 units sold. The auto maker made certain to disclose that the strong performance was broad-based.
The company also reiterated Q4 production guidance for 740,000 units, but Ford also announced that it will build 785,000 units in Q4 . To many, the disconnect between units built and production guidance suggests that Ford might be expecting a better-than-guided fourth quarter.
SUVs show strong performance
Lastly, General Motors posted an impressive 14.7% rise, equaling 275,847 units. The company's growth easily exceeded estimates of 11%, as Buick and Cadillac ended up being a pleasant surprise, with growth of 37% and 38% respectively.
Moreover, the company set monthly sales records from its Sonic, Spark, and also the electric vehicle Volt. However, the real growth came from crossovers and SUVs, which increased more than 30% and led GM to its best month since September 2008.
Is Auto Still Attractive?
Looking at these three auto giants, it appears as though any could be a strong buy. The auto industry is one of the larger segments in the economy, and when compared to other sectors such as financials and manufacturing, the auto industry's growth is second to none.
Yet despite large returns, these stocks remain cheap relative to the S&P 500. All three have seen stock gains greater than 60% over the last year, but with the exception of Toyota, both GM and Ford are trading near even since January 2011. Meanwhile, the S&P 500 has rallied with gains of 26% in the same period.
In terms of valuation, the attractiveness of the auto industry is evident. Take a look at the table below and you'll see how each compares to the S&P 500 in several key metrics.
Q2 Revenue Growth
Q2 Earnings Growth
As you can see, each of the auto giants trump the S&P 500 in every category, with the exception of GM and earnings growth. During GM's last quarter the company did have higher costs and a tax expense, which kept its net income lower year over year.
Still, net income can be volatile from quarter-to-quarter, revenue and top-line growth should be the gauge of industry strength and performance. After all, it is revenue that shows us the speed at which consumers are buying vehicles.
Clearly, Toyota is the most expensive, but also has the highest margins, and trades at a 50% discount to the S&P 500 relative to sales. Ford is growing the fastest, and GM is the cheapest compared to sales. Therefore, which is best?
Which Is Best?
Toyota has been a steady fundamental performer. But with a higher dividend yield, faster growth, and a cheaper stock, Ford looks better. However, in terms of catalysts and current growth (August sales), GM seems to be the winner.
At just 0.31 times sales, GM is trading significantly cheaper than its peers, largely because the U.S. treasury has been the auto giant's largest stakeholder. During the first seven months of 2013, the government reportedly sold between 23 million and 26 million shares .
Due to the government's ownership, GM does not pay a dividend, which leaves prospective shareholders wary of investing in a company that's owned by the government. Hence, news that the government will fully divest its GM stake by late 2013 or early 2014 could serve as a major compliment to the company's strong growth. From there, the prospect of a dividend and/or buybacks could elevate the stock to a valuation closer to its peers'.
This is a great space, and you can't go wrong with any of the noted names. But, looking at the August reports, and considering valuation and near-term events, the winner has to be GM.