Earnings season is in its final stages with most of the large companies already done with reporting their quarterly results. Auto stocks reported a strong quarter on the basis of strong U.S. auto sales. However, the recent weakness in auto sales for consecutive three months (Feb-April) has sent bearish signals to the market.
In this situation, it is important to analyze the prospects of Detroit-based automakers. Let’s have a look at the investment strategy of these automakers.
D-2 players
General Motors Company (NYSE:GM) has been a favorite stock among analysts since the Treasury decided to reduce its stake in the company. The Treasury currently owns 16.4% stake in the company, that has declined by 2.6% (was previously 19%) since the start of the year.
Not only this, the bulls like GM for its best-in-class leverage to global growth markets, ongoing operational turnaround, and improving product cadence. General Motors Company (NYSE:GM) is well positioned to capitalize upon strong long-term growth in emerging markets, and is winning the race for the future in China in particular. In developed markets, higher profits in North America — spurred by a rising top line and a new generation of full-size pickup trucks — are expected to more than offset continued losses in Europe.
The other player
Similarly, Ford Motor Company (NYSE:F) is rated as a buy on the success of its “One Ford” strategy and modest valuation (despite a 10% rally since the start of the year). Ford has streamlined its operations substantially under the One Ford strategy, selling off non-core businesses and brands. Its management, designers, and engineers around the world are now squarely focused on supporting the core Ford brand. As a consequence, Ford is now more focused and working more effectively than ever before, and has accelerated the development of desirable new products that are global in nature.
Ford’s aggressively restructured North American operations are now lean and highly profitable, with the One Ford strategy seemingly having helped solve the long beguiling puzzle of how to turn a profit on small cars in the United States. Ford Motor Company (NYSE:F)’s not having been able to restructure its operations with the assistance of a bankruptcy court does not appear to have placed it at any competitive disadvantage relative to its domestic competitors, as evidenced by its superior profitability. Higher profitability in North America is expected going forward, as Ford capitalizes upon the sustained increase in industry sales as U.S. light vehicle SAAR continues to normalize higher.
A mass-market player?
Apart from General Motors Company (NYSE:GM) and Ford, we don’t find an example of a U.S.-based manufacturer of cars demanded in the mass market. However, many have held their hopes, including me, that Tesla Motors Inc (NASDAQ:TSLA)‘s cars will reach mass market one day.
JPMorgan has been adamant in giving their neutral rating on Tesla Motors Inc (NASDAQ:TSLA). It views notable investment positives like a highly differentiated business model, appealing product portfolio, and leading edge technology. However, the above average execution risk is what keeps JPMorgan on the sidelines.
Furthermore, JPMorgan believes that expansion into higher volume segments with lower price points seems fraught with greater risk relative to demand, execution, and competition. Meanwhile, valuation appears to be pricing in upside related to expansion into mass market segments beyond the currently announced Model S and Model X segments.
However, what JPMorgan doesn’t take into account is that Tesla Motors Inc (NASDAQ:TSLA) is attractively saddled with none of the pension, OPEB, and other legacy costs which frequently burden large entrenched automakers. Its products are bold, distinctive, elegant, and highly entertaining to drive. The company is led by visionary leadership, backed by a management team with solid functional strength.
No doubt, Tesla Motors Inc (NASDAQ:TSLA) has remained a highly polarized stock. Barclays has given the stock a $65 price target and believes that the company’s products can enter the mass-market as early as introduction of Gen-III Model in 2017.
My Foolish take
Auto companies are having a great time out there in North America. A recent pull back of auto sales might not be a worry when the bigger picture is kept in mind — with average age of the U.S. fleet at record high levels, cheap and easy availability of credit and replacement demand on the rise, there is hardly any chance that autos sales will not keep up their momentum.
Overall, I am bullish on all three stocks. General Motors Company (NYSE:GM) has been attractive due to its phenomenal growth in China. Ford Motor Company (NYSE:F) is a cheap stock and its One Ford strategy is really working well. Tesla Motors Inc (NASDAQ:TSLA)’s differentiated product model has worked and is expected to work in the future as well.
The article These Automakers Are Worth Buying Despite a Temporary Blip originally appeared on Fool.com and is written by Zain Abbas.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
