How To Ride A Rebound In The Automobile Industry

Includes: F, TM
by: BubbleBustInvesting

Automobile stocks, together with other cyclical stocks, have been lagging the major market indices. Obviously, investors do not seem to believe that Fed's QE would reach the Main Street any time soon to help consumers buy high-ticket items like automobiles.


5-Day Performance (%)

3-Month performance (%)

12-month performance (%)

Toyota (NYSE:TM)




Honda (NYSE:HMC)




Ford (NYSE:F)




General Motors (NYSE:GM)




Nevertheless, the sector may be turning the corner, according to robust March sales published on Tuesday morning. Ford's sales, for instance, rose 5.7 percent, GM's 6.7 percent, and Toyota's 1 percent. What do these numbers mean for investors? Which automobile companies offer the best prospect for capital appreciation?

My top choice is Toyota, as it enjoys a Toyota enjoys a number of strengths and opportunities: A large scale that allows it to command the highest margins in the automobile industry; economies of scope that allows the company to cater to different market segments, including the luxury Lexus line. Toyota further enjoys a strong brand name and a big presence in emerging markets, including China, where there is plenty of room for further growth.

At the same time, Toyota faces a number of weakness and threats: Its competitive advantage is sensitive to currency fluctuations, especially the yen-dollar rate, and its sales are sensitive to world economic growth. Toyota is further vulnerable to competition from domestic and overseas automakers, while its China growth is vulnerable to the China-Japan territorial conflict.


Forward PE

Operating Margins

Qtrly Revenue Growth

Qtrly Earnings growth



4.82 %













General Motors





I would also buy Ford for five reasons: First, the doubling of its quarterly dividend, from 5 to 10 cents per share, an appealing proposition for today's low interest rate environment.

Second, Ford is seeing an improvement in economic fundamentals. With improving quality and the introduction of new models, Ford has been benefiting from a broader recognition of its brand - Ford's 2013 Fusion was named Car of the Year by AOL Autos. The company has further expanded its overseas presence, especially in China, where it is the largest foreign company. It is also expected to benefit from the backlash of the territorial disputes between Japan and China.

Third, the company is seeing improving financial fundamentals, especially in its profit margins. Ford was the only American automobile company that didn't receive government money during the 2008 crisis. Last year, both S&P and Fitch raised Ford's credit rating.

Ford Motor Company

Operating Margin


Quarterly Revenue Growth


Quarterly earnings growth


Forward P/E*


Total Cash


Operating cash flow


*Fye Dec 30, 2013; Source:

Fourth, Ford has been very aggressive in addressing its European market woes by idling factories, cutting thousands of jobs, and taking a $3 billion charge over the next two years.

Fifth, the introduction of new more-fuel efficient products that cater to different segments of the global economy, including the all-mew Ford Fusion and Mondeo, Escape and Kuga, EcoSport in South Africa, and B-Max in Europe.

A few words of caution: Automobile stocks are highly cyclical. This means they are exposed to fluctuations in the global economy. That's why I would constantly keep an eye to the frangible global recovery, especially in Europe where even France and Germany seem to head for a contraction rather than an expansion

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.

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Tagged: , , , Auto Manufacturers - Major
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