Compared with that, both large car companies look dirt-cheap. Ford Motor Company (NYSE:F) is trading at a multiple of 9, General Motors Company (NYSE:GM) at 10.
But don’t be fooled.
The Case For Cars
The case for both companies looks strong on paper.
Input costs, especially for energy, are at historic lows compared with the competition. Labor costs are under control, and market shares are rising.
The most recent report for March shows General Motors Company (NYSE:GM) with about 16.9% of the U.S. market, and Ford with 16.2%. GM is doing a little better in cars, Ford a little better in trucks.
Exports are also strong. Ford Motor Company (NYSE:F) thinks it can double its share of the Chinese market to 6% in the next two years, and is building factories in China aimed at doing just that. Ford has returned to giving dividends, and at its present price provides a yield of over 3%.
There are bulls who feel even more strongly about General Motors Company (NYSE:GM). The company paid back its government loans late last year, taking a $14 billion loss for the December quarter in order to get out from under government control.
GM is now upgrading its light truck line and has passed Volkswagen in global sales, becoming the second largest car company in the world after Toyota. It has profits and limited debt, and while it’s unlikely to resume paying a dividend soon it has warrants that look very attractive. If you like GM’s prospects, that’s the way to play.
But I’m going to tell you now that you should stay away from these stocks, that there are better buys out there, even in the U.S. vehicle market. Ford and General Motors Company (NYSE:GM) are highly unlikely to gain expanded multiples on their earnings, and neither stock has moved much in the last year.
You’re much better off looking for bargains.
CAT: The Case For Industrial Vehicles
Caterpillar Inc. (NYSE:CAT) never took government money, and never fell the way the carmakers did. But backhoes and other industrial vehicles are still vehicles, Caterpillar is a maker of vehicles, and the economics of production are quite similar.
While Caterpillar is a steady dividend payer, its yield at this point is just 2.17%, much lower than that of Ford. And it is selling for nearly one-third less than its peak price, achieved last year, of $116.
But Caterpillar Inc. (NYSE:CAT) remains your best bet for profits right now. Its fall in value was fueled by narrower profits, which are now in the range of both Ford and GM. Its balance sheet is stronger, with plenty of cash to fuel debt, and a debt-to-assets ratio below 0.5. The company has strong operating cash flow, and room to grow.
Caterpillar Inc. (NYSE:CAT) doesn’t make cars and trucks. It makes farm and industrial equipment. These are markets that are due to grow as the economy expands, perhaps much faster than consumer markets. The company makes machines that are well-suited to use in both the oil industry and in oil infrastructure, which is booming. The company is especially strong in China, where recent weakness has turned up in the parent company’s results, but that economy continues to grow, and thus so should Caterpillar Inc. (NYSE:CAT) sales.
Thanks to its recent fall from grace, Caterpillar Inc. (NYSE:CAT) is now selling at a PE of just 9.76. This is lower than that of General Motors Company (NYSE:GM), and only slightly higher than that of Ford, despite its solid growth prospects. The company hasn’t always been such a bargain, and unlike the car companies has traded at double-digit multiples in the last several years.
It can again. At current prices Caterpillar Inc. (NYSE:CAT) offers a 2.5% dividend that is likely to expand, and solid growth prospects in both the U.S. and internationally. Right now it’s the true bargain on the vehicle board.
The article The Car Giants Are Fully Valued, But Vehicle Values Exist originally appeared on Fool.com and is written by Dana Blankenhorn.
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