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Car sales have been strong in the United States for the past couple of years and that has been very positive for domestic automakers. General Motors (NYSE:GM), Ford (NYSE:F), and Chrysler have all seen strong sales. It is another story in Europe, where a debt crisis and rising unemployment have caused a sharp drop in auto sales. The strength in the U.S. has been enough to offset the weakness in Europe, and that is likely to continue. Both General Motors and Ford shares look cheap at current levels as investors ignore the positives and focus on negative European headlines. However, there are a couple more reasons why domestic automakers could be poised for upside, and that is because Toyota (NYSE:TM) is facing a couple of major challenges:

1. Toyota has had a number of recall issues in the past couple of years, and it just announced another one for a faulty power window switch that could cause a fire. This latest safety recall involves more than 7.4 million cars, which is one of the largest recalls in automotive history. This is another blow to Toyota's image and it could have an impact on sales and lead to stronger sales for Ford and General Motors.

2. A dispute over an island in the East China Sea has caused an uproar between China and Japan. This has been playing out in the media, and it has caused Chinese consumers and businesses to boycott Japanese goods. Some Japanese companies have even seen vandalism and property damage occur. The impact has been particularly negative for companies like Toyota, as auto sales have plunged in China. A recent article sums up how severe the drop is, and it states:

A report by J.P. Morgan, released Tuesday, projected Japanese auto exports to China will crash 70 per cent during the October-December period.

Both Ford and General Motors could be poised for a sustained surge in sales and expanded market share in China. China is one of the largest markets for car sales, and it is also GM's single biggest market. GM has been expanding in China, and it is well-positioned to capture sales that might have been destined for Toyota prior to the China-Japan dispute, as well as the major new safety recall. Ford is also well-positioned in China, and the company is already seeing a surge in China sales. Just days ago, Ford announced a 35% jump for sales in China. With no resolution in sight over the dispute, these two companies are poised to continue seeing strong sales for the next couple of quarters. That could lead to improved financial results, especially when considering that the car market in China is bigger than the United States. One final point to consider is that Ford and GM shares look extremely undervalued when compared to Toyota, since it trades at about 10 times earnings, while Ford and GM trade at a 40% discount to that metric. Here is a closer look at all three stocks:

Key Data Points For Ford From Yahoo Finance:
Current Share Price: $10
52-Week Range: $8.82 to $13.05
Dividend: 20 cents per share which yields 2%
2012 Earnings Estimate: $1.26 per share
2013 Earnings Estimate: $1.47 per share
PE Ratio: about 6 times 2013 earnings estimates

Key Data Points For General Motors From Yahoo Finance:
Current Share Price: $23.87
52-Week Range: $18.72 to $27.68
Dividend: none
2012 Earnings Estimate: $3.11 per share
2013 Earnings Estimate: $3.87 per share
PE Ratio: about 6 times 2013 earnings estimates

Key Data Points For Toyota From Yahoo Finance:
Current Share Price: $77.68
52-Week Range: $60.37 to $87.15
Dividend: $1.40 per share which yields 1.8%
2012 Earnings Estimate: $7.22 per share
2013 Earnings Estimate: $8.09 per share
PE Ratio: about 10 times 2013 earnings estimates

Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.

Disclosure: I am long F. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Ford And GM Shares Are Likely To Benefit From Toyota's Troubles