Ford has been growing steadily
After announcing unsatisfactory first-quarter results, Ford Motor Company (NYSE:F) witnessed a decline in its stock price. As a consequence, Deutsche Bank analyst Rod Lache downgraded Ford from buy to hold. Lache stated that the firm “has potential upside from improving losses in Europe and a pickup truck recovery, but pricing may become tougher in certain segments and we caution that Ford may face the same dynamic of lowering expectations that we’ve recently seen play out for GM (we believe Ford Motor Company (NYSE:F) faces the same headwinds that led to it’s guide being below consensus).”
Regardless of the aforementioned position, Goldman Sachs updated their rating from buy to conviction buy, principally encouraged by the company’s growth prospects in Europe, Asia, and Latin America. Several reasons that lead them to believe that this company will perform positively will be listed below.
After the crisis, competing firm General Motors needed to be bailed out by the U.S. federal government. Nevertheless, Ford recovered on its own and is bound to continue to grow as it plans to set in motion a plan to boost profit in Europe that is very similar to the one used for the recuperation in the U.S. — closing plants, reducing unnecessary white collar staff, introducing new models, and implementing aggressive marketing campaigns. The European market is expected to drive Ford´s growth, adding $2 billion (about 25% of Ford Motor Company (NYSE:F)´s 2012 pre-tax earnings) to its bottom line in just two or three years.
Alongside progress in Europe, China, the world´s largest vehicle market, provides further development prospects as Ford establishes in Asia, capturing important portions of General Motors´ and Volkswagen´s market share in the region. Analysts estimate that another $2 billion could be added to Ford’s profit by the Chinese market by 2015.
As stated by John Rosevear of The Motley Fool, even “if Ford does nothing else but end its losses in Europe (which will probably total $2 billion this year) and hold its ground everywhere else, we could be looking at a nearly 50% increase in Ford’s pre-tax profits by the end of 2015.”
An auto leader
Although General Motors Company (NYSE:GM) needed a federal government bailout after the last economic crisis in the U.S., several signs of a turnaround cannot be dismissed. In fact, when announcing their Ford Motor Company (NYSE:F) downgrade, a Deutsche Bank analyst said that they would recommend buying GM over Ford Motor Company (NYSE:F). Although the company is not yet consistently profitable, some upside is possible.
China provides compelling growth opportunities as General Motors Company (NYSE:GM) continues to penetrate a market with plenty of room for improvement, since only 8.5% of the people own cars. While establishing the Buick and Cadillac brands in the country, General Motors Company (NYSE:GM) is close to finishing the construction of two assembly plants projected to begin operations in 2014. The Shanghai SAIC Motor joint venture offers additional development opportunities for the company.
Currently trading at a P/E of just 9.9, General Motors could be seen as a value stock, mainly given the fact that one of its main global competitors, Toyota, trades at 18.96 times earnings despite having delivered very little growth and no dividends whatsoever over the past year. The opposite is General Motors Company (NYSE:GM)’ case, which has delivered constant revenue growth (almost 50% in revenue CAGR) between 2009 and 2012, thus making its way into David Tepper’s top ten picks.
Several new products have reinforced General Motors Company (NYSE:GM)’ offering, as the quality of their cars has considerably improved in relation to the last few decades. Since excellence has proven to be central in the auto business, the new models should drive the firm’s profit growth and margin expansion.
GM´s top risk resides in Europe, resulting in losses for over a decade now. Morningstar analysts expect this trend to continue for at least a couple more years. Nevertheless, medium and long-term profitability should increase as the firm´s high degree of operating leverage starts to retrieve results, generating upside for investors. For the patient investors, General Motors is definitely a buy.
A promising stock
In the unconventional automotive business, there´s Tesla Motors Inc (NASDAQ:TSLA), that manufactures and designs electric vehicles and electric powertrain components. Just a month ago, the stock price was around $35 and the outlook didn´t seem promising. However, the stock now trades at around $55 as the firm is now expected to post its first profitable quarter by May as their Model S car becomes successful. Although some investors believe it´s already too late to buy this stock, patient investors should take a look as long-term prospects look pretty positive.
Even though the Model S is an expensive car, the U.S. market is proving to be increasingly willing to pay a higher price for a product that offers the excellence that a Motor Trend car of the year like this provides. In addition, the growing production scale combined with the decreasing trend in the Lithium Ion battery prices that the car uses will progressively lower the production costs, given that the battery pack accounts for roughly 25% of a car´s production cost. McKinsey analysts estimate that these prices could decrease another 25% by 2020.
Tesla Motors Inc (NASDAQ:TSLA)’s retail model is also a growth factor. Disrupting the auto business, the firm sells its cars through a few company-owned stores, principally situated in malls, instead of doing this through franchise dealerships. Despite the legal actions taken against Tesla Motors Inc (NASDAQ:TSLA) by some car dealers, the company could stand its position and continue to exercise its particular strategy in various U.S. states, while the upcoming decision in Texas could enhance the stock price.
Conclusions
Since Ford is cheap, it is not a surprise that many analysts (Goldman Sachs, Morgan Stanley) recommend buying the stock. Also trading at similar P/E ratio while offering plenty of upside is General Motors Company (NYSE:GM).
For those looking for less conventional and longer-term investments, Tesla Motors Inc (NASDAQ:TSLA) should be their choice. The stock currently seems quite undervalued given the long-term growth potential of this company.
The article 3 Stocks to Watch in the Auto Sector originally appeared on Fool.com and is written by Victor Selva.
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