2 Stocks to Buy in the Automotive Industry

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Includes: F, TSLA
by: Benjamin Goldman

The automotive industry is a difficult industry to invest in. Characterized by paper-thin profit margins (if there is a profit) and the possibility of devastating recalls at any time, there is a lot of risk involved in any auto company investment. However, there are two very different car companies, Ford Motor Company (NYSE:F) and Tesla Motors (NASDAQ:TSLA) Inc, which I believe are excellent buys in today’s market.

Ford Motor Company: I write a lot of articles on companies that are undervalued, and few of my readers have suggested that Ford is extremely undervalued at the moment. After some research, I believe that they are correct. At the close of August 12th, Ford stock closed at a P/E ratio of 6.60. Ford having a low P/E ratio is somewhat justified in that their earnings are only expected to grow at an annualized rate of 1.3 percent over the next two years. However, Ford has a one year target set at $19.57, which would peg them at a P/E ratio of about 10, which is the norm for a mature company in today’s market.

Tesla Motors Inc: Tesla is an electric vehicle company with a lot of growth potential. They still have not reported positive earnings and are not expected to do so in the near future, but they make a very good product and are making the right strategic moves to be a major player in the rapidly growing electric car market. They are lead by Elon Musk, who is known for his endeavors in PayPal and SpaceX. Tesla’s current line of cars is priced over $100,000, which is too high to attract middle class consumers. However, they plan to release the Model S in 2012, which will sell at an expensive but more affordable $57,400. Prices of electric vehicles are expected to increase in quality and decrease in price over the next few years, similar to most electronics products. This will make Tesla vehicles more affordable and allow them to capture a larger market share in the automotive industry. Tesla is also working with Toyota and Daimler AG to provide the electric components of the Mercedes A-Class E-Cell, the Daimler Smart, and the Toyota RAV4 EV crossover. These partnerships with two of the world’s largest automobile manufacturers will allow Tesla to become profitable if either Daimler AG or Toyota become major players in the electric car market. At a current market cap of $2.71 billion, Tesla is already highly valued, and has the potential to be a high market cap leader in the automotive industry as the electric car becomes more common.

The internal combustion engine is a very mature technology. Similar to the book industry and the movie rental industry, modern technology and consumer demands will eventually cause automotive companies to redefine their value chains and produce cars with higher quality and lower emissions. Both Ford and Tesla are dedicated to this movement and both stocks are great values for those who believe in the automotive industry.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.