The year of 2014 did not start so well for the car stocks (with the exception of Tesla (NASDAQ:TSLA), which many fans consider more of a technology stock than a car stock) after they had a great time between the summer of 2012 and fall of 2013. During this period, Ford (NYSE:F) jumped from $8s to $17s and Toyota (NYSE:TM) jumped from $75 to $135. When the rally of the car industry was the hottest (around last fall), many people were going crazy and claiming Ford would see prices like $30, $40 or even above within a year. Now the rally seems to be over but all the analysts pushing these stocks have disappeared.
The fact is car industry is a highly cyclical industry and investors should set up realistic expectations in order not to burn. In investment, the golden rule is to buy things when they are cheap and sell them when they are not so cheap. In other words, buy when there are no buyers and too many sellers, and sell when there are a lot of buyers but no sellers. This is how "one man's garbage" becomes "another man's treasure." It's funny because many of the people who were telling us to buy the car stocks at their peak (i.e., buying expensive) are no longer here telling us to buy the same car stocks (i.e., buying cheap).
Back in 2012, when I wrote my "Time to Back the Truck Up To Load Up on Ford" article, Ford was trading for low $9s and it was a great time to profit from the company's upcoming rally. Today might be also another good time to take a look at the car companies like Ford and Toyota (I also like Volkswagen as an investment).
On Tuesday, as Toyota was announcing its quarterly earnings, the company upgraded its guidance for the third time this year and told investors that it was expecting to earn $18.8 billion in profits, which is the double of last year's profits. For some reason, investors did not like the announcement and they continued to sell the stock which is now about 15% off from its peak.
After suffering from a strong Yen for years, Toyota is finally taking advantage of Japan's weakening currency. As the company enjoys $40 billion of cash and liquid assets in its bank account, the company has the flexibility to take advantage of any change that might occur in the car industry. Lately, the car industry looks exciting again with all the car companies trying to build most fuel-efficient vehicles in order to show the world that they are not some old dinosaurs who forgot to innovate years ago (even though many people in the investment community seem to believe that Tesla is the only innovative car company in the world while the rest of the car industry is just sleeping on the wheel - no pun intended).
Meanwhile, Ford is having some tough days as the company's January numbers failed to impress investors. The company blamed the bad weather for falling sales even though Ford's sales seem to have fallen at a faster rate than some of the competition. Currently it is too early to tell whether January was a one-off month for Ford or if it is the beginning of a new trend. On a positive note, the company's revenue per car increased slightly during the month. Towards the end of last year, it looked like incentives were making a comeback but the situation might be getting better now that new models are hitting the roads.
China is a battlefield where Ford is gaining on Toyota as the Chinese are boycotting Japanese cars and Ford is seeing the most growth. While the battle in China is far from over, Ford will continue to seek growth in the nation in order to gain global market share and grow in size. Toyota will probably fight back by trying to regain some market share it lost in North America in the recent years. The company is expected to increase its pick-up truck sales in North America in an effort to hit American carmakers where it hurts the most. Keep in mind that American truck drivers have a brand loyalty and it may take Toyota a lot of work to gain some market share in this particular market.
Now, let's talk about valuation, since that's what matters the most. As I mentioned above, Toyota expects to gain $18.8 billion in net profits this year. This gives the company a forward P/E of 9.5 given the company's market cap of $178 billion. Excluding Toyota's cash of $40 billion would give us a forward P/E ratio of 7, which is incredibly cheap even for a company in a cyclical industry. Even if Toyota stops growing all of a sudden, the company's current price still implies a deep discount. In fact, Toyota's current price assumes that the company will shrink in size by about 20-30%. As for Ford, we are looking at another cash-rich company with a P/E of low teens and we get a single-digit P/E once we exclude the company's cash and liquid assets from the calculation.
It looks like the car industry in North America has fully recovered but that doesn't mean the growth of car companies will be complete. There is another market as large as the North American market, namely Europe, which has barely started its recovery. We are also looking at rapidly growing Asian, Middle Eastern and African markets. If the European car industry continues its recovery, companies like Ford and Toyota will have a lot of additional room for growth. As people are selling these two companies despite solid fundamentals, it will create a unique chance for value investors who are hunting for deep valuations.
When I talk about companies like Ford, I never give price targets because I don't want to set such expectations. Both Ford and Toyota are good value plays with relatively low-risk and conservative investors will find a lot of value in these two companies.
Additional disclosure: I am likely to initiate a long position in TM soon.