The market is cheap when you consider historical averages and the low rates on Treasury bonds, money market accounts, etc. Even though many investors have little appetite for stocks at this time, the future may hold much bigger rewards for equity investors. It's rare to achieve exceptional investment results when you follow crowds, otherwise there would be many more Warren Buffett-types in this world. Mr. Buffett is not piling into Treasury bonds or gold, as many investors have been doing for the last few years. In fact, he has been busy buying stocks and recently it was disclosed that he made a purchase of about 10 million shares of General Motors (GM).
Auto stocks could be one of the most undervalued sectors in the market today. Investors seem to be overwhelmed with concerns about the European debt crisis, and the weak economy in the United States. However, there appears to be a disconnect with the fear versus what these companies are earning. Both GM and Ford (F) are solidly profitable. Both have made progress in terms of financial results and design over the past couple of years, and yet the stocks are well below their highs.
Investors who continue to look through the rear-view mirror will remain focused on the lost decade for stocks, the losses taken by investors in the 2008 financial crisis and other negatives. Investors who can look past the valley of the European debt crisis and a couple years into the future, should be able to see that GM shares could easily double in value. Investors like Buffett can look past the noise, negative headlines and short-term challenges facing GM to see a company that is likely to remain profitable, grow book value through earnings, and be positioned in a couple of years to earn even more than it is today. Not only are earnings likely to grow in the next couple of years, but multiple expansion is also possible for all stocks.
Let's talk valuation: Right now, the average price to earnings ratio for the S&P 500 Index is about 13. GM and Ford are much lower at just about 6 times earnings. However, at least one auto stock is trading for around 11 times earnings; that would be Toyota (TM). If Europe and the U.S. economy are able to muddle through the current challenges, multiples are likely to rise as investors tire of earning next to nothing in savings accounts and money markets. A company like Toyota will probably trade for at least 13 times earnings and a general rise in PE ratios could allow companies like GM and Ford to trade for at least 10 times earnings. Here is a closer look at some of the auto stocks mentioned along with further details on why investors who buy GM like Buffett right now, could be poised to double their money in a couple years:
General Motors is facing challenges, but the company is also seeing success in many areas. Some investors are still concerned about the large stake owned by the U.S. Government, and the fact that it accepted bailout money. That stigma could fade in time, just as it has for companies like American International Group, Inc. (AIG) which has substantial government ownership levels as well. GM makes some legendary cars like the Corvette, Camaro, as well as top-selling pickups and SUVs. The company is also seeing success in China, especially with the Buick brand.
Challenges are probably priced-in: In spite of the weakness in Europe, analysts expect GM's earnings to grow in the coming years. The combination of earnings growth and multiple expansion could be a powerful catalyst to push the stock higher by 2014. For example, with earnings expected to be $3.49 for 2012, and the stock trading for around 6 times earnings, the share price is just over $21 today. However, if earnings rise to $4.55 per share in 2013, and the multiple expands to about 10, the shares could be trading for about $45 a piece in a couple years. Earnings are expected to be even higher in 2014, which could add to the upside potential. Also, it's important to note that GM shares have a current book value of $18.43 per share, but as it continues to earn profits, the book value will rise and be much higher by 2014. This will help to support a higher stock price. With GM shares trading for about 6 times earnings, while Toyota trades around 11 times, and with the S&P 500 Index trading near 13 times, this huge valuation gap is likely to be resolved by sending GM shares higher. Based on facts and reasonable projections, it's easy to see how Warren Buffett might double his money in the recent GM investment.
Key Data Points For General Motors From Yahoo Finance:
- Current price: $20.64
- 52-Week Range: $19 to $32.08
- Dividend: none
- 2012 Earnings Estimate: $3.49 per share
- 2013 Earnings Estimate: $4.55 per share
- P/E Ratio: about 6 times earnings
Ford Motor Company shares also appear very undervalued and investors seem to be ignoring many of the positive developments at the company. The balance sheet has improved to the point where the company has seen agencies raise the credit rating and Ford also reinstated the dividend for the first time in years. Ford did not receive bailout funds and it does not have government ownership issues like GM does. It also has an excellent management team, which includes CEO Alan Mulally. If Ford shares are able to see PE multiple expansion and earnings growth, the stock could be trading around $17, in a couple of years, which would be about 10 times earnings estimates for 2013.
Key Data Points For Ford From Yahoo Finance:
- Current price: $10.27
- 52-Week Range: $9.05 to $14.22
- Dividend: 20 cents per share which yields 1.9%
- 2012 Earnings Estimate: $1.49 per share
- 2013 Earnings Estimate: $1.72 per share
- P/E Ratio: about 6 times earnings
Toyota Motor Corporation is one of the world's largest and most respected automakers. It makes a number of the most popular car models such as the Prius, Camry, etc., and it also owns the Lexus brand. Like every major automaker, it has had some recalls and other issues, but the overall quality is extremely high and this has led investors to value the shares at about 11 times earnings.
Key Data Points For Toyota From Yahoo Finance:
- Current price: $76.26
- 52-Week Range: $60.37 to $87.15
- Dividend: 95 cents per share which yields 1.2%
- 2012 Earnings Estimate: $6.80 per share
- 2013 Earnings Estimate: $7.75 per share
- P/E Ratio: about 6 times earnings
Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.
