By Austin Smith
In 2008, when the Big Three automakers went to Washington with regard to financial problems, the stability of the economy, as well as the industry, came into question. Over three years later, both Ford and GM are making profits again. Below is a list of 5 stocks from the automobile industry that deserve closer examination.
Ford Motor Company (NYSE:F) – The American car making company begins the list with an above-average beta of 2.53, making this stock more than twice as volatile as the market. Currently, the stock does not offer dividends to investors. Ford’s current earnings per share of $1.66 give the stock a price to earnings ratio of 7.1. This is less than half the industry average ratio of 17.6 and around a third of the S&P 500 average, currently around 24.2. Though it may appear based on this ratio that Ford is undervalued, the price to book value of the company is 7.47, which is much higher than the industry average of 1.99.
When comparing the net income of Ford with competitors General Motors Company (NYSE:GM) and Toyota Motor Corp. (NYSE:TM), Ford does nicely in comparison at $6.79 billion compared to Toyota at $2.60 billion, though it is slightly behind General Motors at $7.62 billion. Now that Ford is nearing the endpoint of the company’s turnaround plan, investors should see continued improvements in profits and margins. The company has already seen its 2012 F-150 knighted as Truck of the Year. What this could mean for investors is the price could begin to rise toward the 52 week high, just under $20 per share, and also bring the price to earnings ratio closer to the industry average.
General Motors Company – Since coming out of bankruptcy, GM went through its IPO in 2010. From there, shares have ranged from the upper $30s to slightly below $20 over the course of 52 weeks. Currently it is in the lower $20s, closer to its 52-week low. As a result of the bankruptcy and new IPO, the stock does not offer a dividend to investors. The company’s earnings per share of $5.04 give the stock a price to earnings ratio of 5.2. Like Ford, this is well below the industry average. The biggest difference is that the price to book value of GM is also extremely low at 1.04, whereas Ford has a much higher ratio.
Based on these ratios, GM could be undervalued. Even looking at analyst estimates, the mean target price is $32.59, giving the stock plenty room to grow. If the stock were to reach this price from its current level, it would realize a gain of over 40%. One concern worth noting for the company is in its Chevrolet Volt, a plug-in electric hybrid. General Motors has asked for owners to bring their cars in for free repairs to fix a problem that may cause battery fires. Fortunately, GM was able to do this before owners reported any accidental fires.
Toyota Motor Corp. – By consistently selling some of the top sedans every year, Toyota’s stock realizes numbers that are quite different than its competitors. Currently the stock has a beta of 0.66, making it less volatile than the market. The dividend is currently $0.95 annually, which is a yield of 1.40%. With earnings per share of $1.41, Toyota has a price to earnings ratio of 41.2. This is over twice as high as the industry average, giving it the appearance that it could be overvalued. However, Toyota’s price to book value is only 0.83, meaning the total net worth of the company per share is less than what it is actually selling for. This is something that investors look for when trying to find a stock that is underpriced by the market. As analysts see the company, they feel the stock is currently overpriced with a mean target price of $57.67. Even though the price to book value is attractively low, many are looking at the extremely high price to earnings ratio, which could be the reason for the low price expectations.
Harley-Davidson, Inc. (NYSE:HOG) – Although it does not manufacture the same kind of vehicles as the other companies listed above, Harley-Davidson is in the automotive industry and is definitely a stock worth looking at. The beta for Harley is 2.40, making is slightly more than twice as volatile as the market. The company does offer a dividend of $0.50, or 1.30% annually. Currently, the company has earnings per share of $1.90, which gives the stock a price to earnings ratio of 20.7. Analysts predict the stock will rise slightly, with a mean target price of $44.46. Given its current price, this would be an increase of about 12%. Harley does have potential growth opportunity as it currently tries to increase operations in India, hoping to tap into the market as younger adults there splurge on higher-priced bikes.
Honda Motor Co., Ltd. (NYSE:HMC) – With a beta of 0.68, Honda is one of the least volatile stocks on this list. The company currently offers a dividend of $0.70, which is the highest yield on this list at 2.20%. The company’s earnings per share of $1.44 give the stock a price to earnings ratio of 20.5, slightly higher than the industry average. Looking at the price to book value, Honda has a ratio of 1.04, which almost half the industry average. The company’s net income of $2.83 billion put Honda ahead of Toyota but behind both Ford and General Motors. Currently, the analysts' mean target price for the stock is $41.54. Based on the stock’s current price, this would lead to an increase of just under 30%. Part of Honda’s decline was due to the tsunami in Japan and floods in Thailand, as both caused the company difficulties in keeping its factories running. If this is avoided for 2012, then the stock’s earnings and price could make a solid recovery.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.