Tata Motors (TTM): Why Exactly Is It An Interesting Play on the Auto Industry?

Cheapest Cars in the United States??

Tata also plans to grow by focusing on expanding its international operations in new markets all over the world, including the United States, where Tata would love to become a major player.  A few months ago, Tata announced that it was redesigning the Nano for the U.S. market, and plans on selling it within three years.

Although by upgrading the Nano to meet U.S. standards will mean a significantly higher price tag then it has in India, the Nano will still be very inexpensive.  Changes that must be made, such as emission controls, safety features, and conveniences such as power steering, traction control, and a bigger engine should bring the Nano’s base price to around $8,000.  This would make the Nano America’s cheapest car by a large margin, as the next cheapest new car is the $11,750 Nissan Motor Co., Ltd. (ADR) (PINK:NSANY) Versa.

How to Play the Auto Sector

The right automaker for your portfolio depends on your risk level, as well as what direction you think consumer spending habits are heading.  Tata is a fantastic choice if you believe (as I do) that the decline in India’s auto sales is temporary and that the increase in middle-class spending will continue.  I also think that Tata is a great investment before the U.S. version of the Nano is released, which I believe will be a great success here.

Valuation and Alternatives

Tata is a relatively high-risk way to play the sector, and its low valuation of less than 9 times forward earnings is evidence of this.

If you want a safer, more traditional approach to the auto industry, Toyota Motor Corporation (ADR) (NYSE:TM) may be the way to go.  The largest automaker in the world, Toyota Motor Corporation (ADR) (NYSE:TM) makes a great product and is a very stable company, and shares trade at a premium valuation of 15.1 times forward earnings.  As stated before, Toyota is possibly the safest way to play the auto industry, and should provide shareholders with nice, steady returns over the next few years.

If you want a little more risk/reward, Ford may be worth a look.  Ford trades at just 8.7 times forward earnings, and has also had a pullback lately, down about 12% from its highs.  With earnings projected to grow by 11% annually going forward, Ford could produce great returns, if they are able to sustain their turnaround since the crisis of a few years ago.  Ford is actually the best dividend payer of the group, yielding over 3%, as opposed to around 1.4% for the other two companies mentioned.

Conclusion

Whichever way you decide to invest, I think the auto industry in general has several growth years ahead of it.  That said, I think Tata has the most potential of the group, especially if they successfully capture some of the low-end new vehicle market in the United States.