Are These 4 Auto Stocks Worth Buying?

Includes: F, GM, HMC, TM
by: Dividend Kings

Investors looking to invest in auto stocks should wait until better investment vehicles pull up. At current valuations, General Motors (NYSE:GM), Ford (NYSE:F), Toyota (NYSE:TM) and Honda (NYSE:HMC) fail to offer investors any real compelling investment opportunities. Other industries provide more compelling investments at this time.

China Riots against Japan

Anti-Japanese protests have occurred in the People's Republic of China based on new developments in a long-standing territorial dispute with Japan. This unrest is leading to lower sales for Japanese products in the PRC. The PRC and Japan claim territorial sovereignty over islands called Senkaku in Japanese or Diaoyu in Chinese. Substantial fossil fuel reserves are thought to reside under these islands. This dispute was stirred when these islands were purchased by a Japanese private buyer. Chinese citizens responded with riots, boycotts, and strikes against Japanese trade partners. This dispute continues to damage trade relations between Japan and China.

This development is particularly bad for Japanese automakers since their cars are a symbol of Japanese influence and economic domination. Protests forced shutdowns of Japanese-run manufacturing plants and businesses in China, including Toyota and Honda. Worse yet, Chinese rioters attacked Japan carmakers dealerships including Nissan (OTCPK:NSANY), Toyota, and Honda showrooms. China-based factory closings have made a dent in earnings for Honda.

Japanese auto sales in China will probably fare worse than other retailers. A 63 percent drop in sales was reported by Mitsubishi. Similarly, a 35 percent fall in monthly car deliveries was reported by Mazda. This number was below what was shipped in the aftermath of the Tsunami. Data similar to these are expected to be similarly horrible for other Japanese auto sales. We will have to wait to learn what long-term damage has been done to Chinese views of Japanese autos.

Toyota Remains Optimistic

Toyota Motors gained 18 percent worldwide sales in the last quarter from two of its new car models: Prius hybrids and Camry sedans. Many business analysts expect that it will lead General Motors in 2012 sales.

Asia's largest automaker, Toyota Motors, is in a favorable business position in all over the world-except in China. According to company spokeswoman Yurika Motoyoshi, Toyota delivered 2.43 million units in the last quarter with is 0.37 million higher than the same period of last year.

A California-based company Auto Pacific industry analyst Ed Kim stated, "Thinking back to the start of the year, I didn't expect Toyota to recover as quickly as it has, Toyota has such a huge and massive owner base that keeps coming back for more and more. That was underestimated."

Although Toyota is facing an anti-Japanese backlash in China because of the recent island dispute, management sees a prosperous future in the China. Toyota is investing in product development as President Akio Toyoda stated that company is planning to launch 19 new models of car in the current year to capture more markets, and this step may lead to get the title of the worlds' biggest automobile company.

More Problems for Toyota

Toyota was aware of defects in its power-window switches as early as 2008. The company management may have been weary of additional recalls after its expensive accelerator pad recalls in 2010. Did Toyota management delay action over power-window switches to save face? Expect recall scandals to help fill the void in news coverage after the election since the media has not run with this yet.

Between 2009 and 2010 there were 7.43 million Toyota vehicles recalled for acceleration defects around the world. In addition to the cost of a recall, Toyota paid $16.4 million as penalty for not reporting some of the flaws in its vehicle's accelerator pads. The recall was a huge cost for the firm even though it was the right thing to do.

In October 2012 Toyota announced another recall. This one was in response to faulty power-window switches. The company had warning of these to these problems as early as 2008. Evidence of Toyota's foreknowledge of this issue was posted on the webpage of the United States National Highway Traffic Safety Administration. The posting revealed that Toyota's Japanese headquarters received a report which cited an "unusual smell" and "thermal damage" in the power-window main switch.

This scandal has the potential to be a serious problem for Toyota. Consumers may resent any reluctance to take action for customer safety.

Price Wars for Luxury Sales

Luxury car lines are likely to see declining margins since they are starting their end-of-year discounts earlier as they fight to win the sales war of 2012 in the U.S.

For example, BMW (Bayerische Motoren Werke) now offers customers an opportunity to buy new models of their cars they currently lease at a discount. Both BMW and Mercedes-Benz sales have pulled ahead of the Lexus, a brand produced by Toyota. The new lead for these luxury cars is new, as the Lexus has been the leading luxury brand in the U.S. for the past eleven years.

The president of Ford, Mark Fields, is busy rebuilding the Ford Lincoln brand. Lincoln sales have fallen 1.5% in the U.S. during third quarter 2012. In the same period sales of Mercedes Benz in the U.S. went up 13%, while sales of BMW rose 4.9% in the U.S.


Today's financial metrics and challenges are not compelling for Japanese or American automakers:














General Motors

















Though they trade at reasonable valuations, Ford and General Motors should be considered speculative. Based on its high debt-to-equity ratio, Ford is highly leveraged. Also disconcerting, General Motors has recently emerged from bankruptcy, which is not a good indicator of financial stability. Japanese automakers Honda and Toyota face considerable headwinds in China while trading at higher valuations. Thus, they are not better alternatives.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.