Up close to 17% year to date, Ford Motor Company (NYSE:F) hasn’t had quite the same 2012 as some of its peers, but it may provide the best value going forward.
Ford’s revenues are expected to be up only 3% this year due to weakness in Europe and slowing growth in the Americas. The company expects to return to profitability in Europe before 2015, achieving long-term operating margins of 8%. Also helping a turnaround will be Ford’s transition from trucks to smaller cars, which will allow for better global market penetration; over a third of small car demand is expected to come from Asia.
Ford has been showing a particular focus on high-demand hybrid vehicles, with initiatives to invest $135 million in the space over the next few years. The company’s bottom line is expected to benefit from moving some manufacturing operations into India, and around 80% of Ford’s global growth can come from China and India over the next decade. Billionaires Jim Simons, D.E. Shaw and Ken Griffin were all adding large amounts of Ford shares to their portfolio last quarter (see Ken Griffin’s newest picks here).
From a valuation standpoint, Ford is cheaper than most of the other top-tier car companies. The stock trades at a current P/E of only 3x, while General Motors Company (NYSE:GM)‘s earnings multiple is more than thrice that of Ford. We also find the profitability argument very compelling; Ford has the highest margins – 12% EBITDA margin and 8% operating margin – of the five stocks listed here. Based on next year’s EPS estimates, Ford could see upside of 20% by Christmas 2013, and a 1.6% dividend yield is better than most automakers will pay.
GM, meanwhile, is Ford’s biggest competitor, and is up over 35% year to date. Compared to the Japanese automakers, GM is also a bit cheaper on the valuation front. Despite its strong performance of late, the company still has the weakest profitability in the industry with an 8% EBITDA Margin and a 5% operating margin. GM calls billionaire David Einhorn as one of its top shareholders (check out David Einhorn’s top picks).
What about Toyota and Honda?
The major Japanese automakers Toyota Motor Corporation (NYSE:TM) and Honda Motor Co Ltd (NYSE:HMC) are expected to see some of the more robust growth over the next half-decade, each with expected EPS growth rates of greater than 30%. Toyota has the best growth prospects of the two, as well as any of the five auto companies mentioned here, at a 40% long-term expected earnings growth rate. Billionaires were flooding into Toyota last quarter, with Ken Fisher, Jim Simons and Bill Gates all adding the car company to their portfolios (check out Bill Gates’ top picks).
Honda pays a superb dividend yield of 2.3% with only a 37% payout. The stock’s downside is its industry-high P/E ratio of 16x and a rather low operating margin of 4%. Compared to Toyota, Honda is up half as much year to date, but has a far richer valuation. Overall fund interest in Honda was weak last quarter, but mega-hedge fund manager Jim Simons was still its top name investor (check out Jim Simons’ favorite bets).
Last but certainly not least, the up-and-coming electric car company Tesla Motors Inc (NASDAQ:TSLA) trades at a particularly out-sized valuation given its negative earnings. Tesla is still up 19% year to date – and up 80% since its July 2010 IPO – despite its inconsistent profitability. At an expected 5-year earnings growth rate of 38%, though, it is a solid opportunity should investors decide to bet on high-end electric cars. Billionaire Steve Cohen dumped his entire stake of Tesla last quarter, perhaps as a profit-taking move (see Steve Cohen’s biggest bets).
To recap: Ford’s valuation is compelling, and the stock looks like a good investment going forward. It’s upside potential that makes Ford undervalued, and the stock also pays a robust dividend yield that is only a 3% payout of earnings. For more coverage of top-tier automakers, continue reading below:
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