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Don't be fooled by the attractive price multiples of U.S. and Japanese automaker stocks. Yes, they are often trading at cheap price multiples. However, these discounts come at the cost of higher risk. Ford (NYSE:F) is highly leveraged and General Motors (NYSE:GM) is eager to follow suit. Japan's automakers are suffering setbacks from angry Chinese counterparties and customers. They are also domiciled in a country with an expensive and appreciating currency.

The Bait: Low Valuations

Current financial metrics illustrate how these stocks appear attractive on the basis of price multiples:

Ticker

Company

P/E

P/S

P/B

D/E

F

Ford

2.58

0.33

2.55

5.86

GM

General Motors

9.85

0.27

0.98

0.4

HMC

Honda

13.44

0.5

1.01

0.92

TM

Toyota

18.01

0.55

0.97

1.12

Ford has the debt one would expect from a financial services company, because to a large extent it is an auto-loan company that also sells cars.

General Motors is not far behind based on news that it is gaining access to an $11 billion revolving line of credit. This borrowing facility consists of $5.5 billion which will mature in five years and $5.5 billion which will mature in three years. This credit line doubles its $5.5 billion five year facility that was meant to mature in 2015. General Motors' website said that this new credit line "offers improved pricing and terms, and the ability to borrow in currencies other than U.S. dollars." This will give its financial business, GM Financial, twice the ability to borrow. More than thirty-five institutions from fourteen countries participated in this gargantuan deal.

This expanded line of credit gives the GM more borrowing power than Ford which has access to $9.3 billion in credit facilities. Dan Ammann the Chief Financial Officer said, "The new revolver provides a significant source of backup liquidity and financial flexibility, further bolstering our fortress balance sheet." He added that the new line of credit "represents a strong vote of confidence in the financial strength of our company."

General Motors recently emerged from bankruptcy, which is not a good indicator of future financial stability. This strategic move for more debt financing is also troubling.

Government Motors

Investors must ask if U.S. automakers are really profit-maximizing businesses or if they exist to provide economic stability for politicians. I am not sure.

Consider how General Motors decided to take around 3,000 IT experts from Hewlett-Packard (NYSE:HPQ), increasing its internal information technology efficiency. This transferring of employees is said to be a "cost-neutral solution" for GM to handle IT centers.

General Motors is planning to decrease its internal Information Technology dependency on outsourcing which currently meets more than 90 percent of its IT needs.

General Motors, the largest U.S automaker, has a joint venture with Hewlett-Packard and already installed HP's Enterprise Security Suite, Vertica and Autonomy Software, IT performance Suite and Detroit-based automakers in its technology centers. All in all, GM will take up to 10,000 IT experts from HP in two new innovation centers located in Austin, Texas and Warren, Michigan.

Chief Information Officer Randy Mott interview in an interview, "General Motors is undergoing one of the most profound transformations in our corporate history and GM IT is an important part of that transformation, we're transforming our IT operating model to improve performance, reduce the cost of ongoing IT operations and increase the level of innovation that we deliver to the business."

I am not convinced that such an acquisition is a smart move and I am worried that headcounts might become a political consideration more than an economic one.

Japan's Automakers are Lemon Stocks

Investors looking to invest in transportation stocks are not helped by Japanese automaker stocks. Yes, Honda (NYSE:HMC) and Toyota (NYSE:TM) are attractive on a price-to-book basis. However, this price multiple is based on book values that are denominated in Japanese Yen, a currency trading well above purchasing power parity. Yen appreciation can also damage the competitiveness of Japanese exports.

Chinese Anti-Japanese Rioting

There also seems to be a problem with the Chinese market for Japanese cars. Anti-Japanese protests have sprouted in the People's Republic of China based on a territorial dispute with Japan. This unrest is hurting sales for Japanese products in China.

Both the People's Republic of China and Japan claim sovereignty over small islands. These islands are named Senkaku in Japanese and Diaoyu in Chinese. This dispute was stirred when these islands were purchased by a Japanese private buyer. Presumably the significance of these islands is their fossil fuel resources. Upon hearing news of this purchase, Chinese citizens responded with strikes, boycotts, and riots against Japanese trade partners.

This dispute is especially bad for automakers since Japanese cars symbolize Japanese economic domination. Protests forced Toyota and Honda to shutdown manufacturing plants in China. Chinese rioters attacked Japan carmaker dealerships including Toyota, Honda, and Nissan (OTCPK:NSANY), showrooms.

Japanese auto sales in China will probably fared poorly. A 63 percent drop in sales was reported by Mitsubishi. Similarly, a 35 percent fall in monthly car deliveries was reported by Mazda. Amazingly, this number was dropped below shipments in the aftermath of the Tsunami. We will have to wait and see the long-term damage this dispute has done to the Chinese view of Japanese automakers.

Conclusion

Ford and General Motors should be considered risky based on leverage even though they trade at low valuations. Japanese automakers Honda and Toyota face considerable headwinds in China and suffer Yen exposure. Thus, they are not better alternatives for American investors.

Source: 4 'Hidden Danger' Auto Stocks That Could Sink Your Portfolio Now