Toyota Versus GM/Ford: Classic Hedged Pair Trade

The airlines are famous as shareholder value destroyers. But the automotive industry must rank not far behind. With Toyota generating buzz recently as it anticipates becoming the largest car producer in the world, we thought we'd take a look at the top three players - General Motors (GM), Toyota (TM) and Ford (F).

Here's a useful table:

Note: Stock price appreciation April 1993 (date of TM's New York listing) to present adjusted for dividends and splits but not spin offs.

Toyota is the low cost producer. Although Ford's operating margin looks half way decent, bear in mind that this excludes interest expense which is very high for Ford. The assets/equity ratio is key here. The American producers are struggling under a triple liability burden. The pension and healthcare benefits explosion has been much written about, but far worse is the effect of their financial indebtedness.

Toyota's overall leverage is about ten times less than its rivals.' GM and Ford have effectively been subsidizing their customers with cheap credit and this has further worsened their inferior competitive position in that it overstates their already low operating margins.

Toyota vs. GM or Ford would make a classic hedged pair trade. Toyota on its own does not look that cheap or expensive at around 16 times their own forecast for this year's earnings.

Disclaimer: We do not hold any positions in stocks named.

Comments

[MichaelComeau]

If you like Toyota, why even bother with F/GM? F/GM will move on any kind of random stuff. Gov't bailout is possible, you never know.

[Khooper]

The discrepancy was most marked for Toyota and Ford that switched places. Actually, Ford was ahead of everyone else. The latter were constantly jostling for position in a narrow band. I guess a big impact for the Toyota is the best fuel saver product they launched.