How To Play Auto Companies In The Downturn

Includes: AZO, F, GM, JCI, LEA, ORLY, TSLA
by: Brian Gorban

With the ongoing worries about the general economy, it would seem that automakers and related industries would be among the hardest hit. That is generally sound reasoning, but sometimes what makes a good company and what makes a good stock diverge. Case in point is LinkedIn (NYSE:LNKD), which currently has a viable business model and showing very strong growth, but still trading near an eye-popping 500x price/earnings and close to 25x price/sales. This company, I should reiterate, is by no means like former tech-bubble stocks in 2000, which never should have even gotten funded, let alone taken public, as it should hit over $500 million in sales and have a solid net cash position of close to $500 million. Nonetheless, it's too expensive for the way I invest. Other companies catching my eye are:

Ford Motor (NYSE:F) is a company you've most likely heard of, and the company has been on a tear since its collapse to under $2/share in early 2009, rising to almost $19 in early 2011. However, Ford has been showing some weakness and is now down close to 50% from those recent highs, near $10/share. I think this stock trading at 6x price/earnings, 0.3x price/sales, and with a high-quality management team run by CEO Alan Mulally, is a buy here at $10 per share. Moreover, just this past week, Ford's chairman bought a total of 50,000 shares on the open market, which gives me more confidence.

General Motors (NYSE:GM) stock has been unkind to investors since its emergence from bankruptcy in November 2010 at $33 per share. It's currently down over 30% from those levels, but it looks to have presented us with a nice buying opportunity. At less than 5x price/earnings, 0.25x price/sales, just over 1x price/book, and approximately $20 billion in net cash, I think this is a great buy as well at $22 per share.

Tesla Motors (NASDAQ:TSLA)
has been in the spotlight lately, and I have to agree their roadster is a sexy looking car. But we're not looking to buy their car here, we're analyzing their stock, and the fundamentals don't look pretty. Tesla lost almost $200 million against $175 million in revenue these past 12 months and trades at 14.5x price/sales, which is the richest by far among the major automakers. Their much lower-priced Model S is set to sell in 2012, but I don't think a $40,000+ priced car will do well in these horrible economic times. One encouraging sign is the massive 1.4 million share buy by majority shareholder Elon Musk at just under $29/ per share, and fellow insider Herbert Kohler buying at the same price level 637,000 shares back on June 8. However, I still can't see a justification to buy this company at its current $24 per share price. I'm staying away.

Another way to play the automotive sector is through related industries. Lear Corp. (NYSE:LEA) looks good at $43 per share trading at under 9x price/earnings, 0.35x price/sales, and over $1 billion in net cash. The massive Johnson Controls (NYSE:JCI) is trading at about 13 price/earnings, 0.5x price/sales, and respectable 2.2% dividend yield is a buy at $29/share. Auto parts stores have been benefiting as people look to squeeze as many miles as they can in these rough economic times rather than going out and buying a new car. AutoZone (NYSE:AZO), O'Reilly Automotive (NASDAQ:ORLY), and many of the others are hitting new highs as profits swell accordingly. However, Pep Boys has been left behind, and the stock looks compelling at just over 13x price/earnings, 0.3x price/sales, 1x price/book and strong free cash flow, which should not only allow them to pay their decent 1.2% dividend yield, but look to raise it as management has done in the past. I think at $9.75 per share, the downside is protected and upside clearly there as the economy remains unpleasant.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in F, GM, PBY, LEA over the next 72 hours.

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