October U.S. auto sales increased 7.5%, the best they have been since 2007, but the 5 key players, including the “Big Three” in North America and 2 of the world’s largest car manufacturers, have had mixed results. Two major factors negatively affecting sales this month are the floods in Thailand cutting off supply chains for many manufacturers and the ongoing debt crisis in Europe. On a macro scale, weak consumer confidence and high unemployment have deflated stock prices, making now a good time to buy. The stock prices of all five companies are near their 52 week lows despite the high sales. A likely cause is the slower than expected economic recovery with the Federal Reserve not expected to take action until early next year.
Ford (NYSE:F): Now positioned #1 in U.S. sales, Ford stands a good chance to outperform its competitors. Shares are trading at $11.17 in its 52-week trading range of $9.05 to $18.97at the time of writing. At the current trading price Ford is capitalized at $42.48 billion with earnings per share for the last year of 1.74 and a price to earnings ratio of 6.47.
Ford reported a 6% increase in year-to-year sales for the month of October, with utilities sales leading the way increasing 38% and strong truck sales up 8%. Signaling a trend towards Ford’s next generation of fuel-efficient products, 40% of Ford F-150 buyers opted for the new EcoBoost engines, selling 15,000 in October. The 2012 line-up of Ford vehicles is also relatively risk-free, focusing on fuel-efficient redesigns of current models rather than investing in completely new lines.
While sales look bright in the U.S., sales abroad, particularly in Europe, have been hit hard. Similar to the high volatility experienced by BMW [BMW.DE] and Peugeot [UG.PA] with stock prices bottoming out in the 3rd quarter, the current Euro crisis remains a threat for Ford’s European sales after profits had dropped 79% early this year in this market.
Additionally, Ford remains the car manufacturer with the highest debt to EBITDA (earnings before, interest, taxes depreciation, and amortization) of 6.65 years when exceeding 3.0 is a worrisome figure in the industry. Despite shrinking sales abroad and a relatively large amount of debt, CFO Lewis W. K. Booth said dividends would be restored “as soon as the balance sheet can handle it.” Brian A. Johnson, an analyst at Barclays, predicts that Ford will announce a dividend early next year which has been suspended since 2006. Buy.
General Motors (NYSE:GM): Shares are trading at $23.35 in its 52-week trading range of $19.05 to $39.48. At the current market price, the company is capitalized at $36.48 billion. Annual earnings per share are $4.75 with a price to earnings ratio of 4.93.
After 2 months of surpassing analysts' sales expectations, General Motors announced a disappointing 2% increase over October sales last year, falling short of this month’s expectations.
Chevrolet was GM’s best performer (6% increase in sales) while Buick, Cadillac, and GMC lagged behind. Chevrolet’s electric car, the Volt, had its best month in October selling over 1,100 and beating the Nissan (OTCPK:NSANY) Leaf which sold only 850. The 40-mpg Chevrolet Sonic is also increasing in sales in its second month on the market competing directly with the Toyota (NYSE:TM) Prius.
Like Ford, General Motors has the second highest debt to EBITDA in the industry at 0.95 followed by Tesla Motors Inc. (NASDAQ:TSLA) with -0.74. Dividends have been suspended since July 2008 with no expectation of them being reinstated in the near future. Hold.
Honda Motor Company (NYSE:HMC):
Shares are trading at $30.01 in its 52-week trading range of $28.04 to $44.56. At the current market price, the company is capitalized at $27.04 billion. Earnings per share for the last year were $4.29, and it paid a dividend of $0.71, yielding 2.20% and a price to earnings ratio of 19.51.
Total sales for October are up 4.8% year-to-year, yet remain down 6.6% year-to-date from 2010. Along with Toyota and Tata Motors (NYSE:TTM), the recent flooding in Thailand has caused Honda to suspend operations in the Philippines. Honda has also cut back production in the U.S. to 50% due to the parts supply shortages which are expected to dampen sales for the remainder of the year. Buy.
Tata Motors Ltd. (TTM):
Shares are trading at $19.19, against their 52-week range of $14.33 to $37.65. At the current market price, the company is capitalized at $12.17 billion. Earnings per share last year were $2.99. It had a price to earnings ratio of 6.46 and paid a dividend of $0.42, yielding 2.00%.
This year has been challenging for Tata with exports down 30% from last year and drastically different sales results for its different lines of cars with cumulative sales of the Indica range up 11%, Indigo down 24% and Venture up 23%. Cumulatively, Tata sales are up 5% compared to October 2010.
On the bright side, Tata has one of the highest operating margins in the industry exceeding 10.5%. Tata also has strong positions in many emerging economies including; the Middle East, South and South East Asia, South America, and Africa, which reported an 18.9% increase in new car sales for October. Hold.
Toyota Motor Corp. (TM):
Shares are trading at $65.02, just cents above is 52-week trading low from a range of $64.51 to $93.90. At the current market price, the company is capitalized at $101.6 billion with trailing twelve month earnings per share of $1.78 and a price to earnings ratio of 36.46.
Toyota Motor Corp. is having tough times yet again for a traditionally strong company. Flooding in Thailand, repeating the effects of Japan’s tsunami earlier this year, has disrupted supply chains. Sales have slumped 7.8% from the year-ago month with its Lexus division down 14.2% and the Corolla down 9.2%. As a result of slipping U.S. sales, now behind Ford and General Motors, Toyota is focusing on the fast-growing South East Asian market for its sales growth.
Ford appears to be the best major car company likely to have positive returns in the near future after taking the number one position in U.S. sales, and is largely expected to announce the reinstatement of dividend payments. The company is also poised for the future with several models placed in the 2011-2012 list of top ten fuel-efficient vehicles. Though, with the amount of debt Ford is carrying and its relatively low earnings per share, this may not be the best long term investment.
Toyota Motor Corp. will likely be the long-term winner as the best car company to invest in with an outstanding P/E ratio of 36.46 and plans to expand into emerging markets. This company’s performance has suffered from events largely outside its control, with the exception of the recall crisis in 2010, resulting in the lowest operating margin of the five companies at 1.77%. Looking forward, being a traditionally strong company with a strong hold on the future of fuel-efficient vehicles (Prius and Lexus CT 200h), buying shares by year-end when the price is the lowest it has been since 2009 will pay off when the floods recede and supply chains are restored. Buy.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.