Why not Toyota?
Toyota Motor Corporation (ADR) (NYSE:TM) is an exceptional company that I would love to own, if the price were right. At the present moment, Toyota is too pricey for my tastes. In relation to net income, Toyota Motor Corporation (ADR) (NYSE:TM) is ludicrously expensive. That being said, net income and ratios derived from it are not perfect gauges of company value. Often times, investors point to cash generated from operating as a more reliable metric. Because it factors out non-sales related income and non-cash charges like depreciation, cash flow from operating activities usually provides a more accurate picture than net income. Over the past 10 years, Toyota Motor Corporation (ADR) (NYSE:TM) has generated $224 billion in operating cash flow. During the same period, Ford’s cash flow from operations totaled $135 billion. Toyota generated 66% more cash than Ford over the past decade. Clearly, Toyota Motor Corporation (ADR) (NYSE:TM) is worth more than Ford. But, a 300% increase in price for a 66% increase in operating cash flow makes no sense to me as an investor.
What about the debt?
One of the biggest concerns for investors regarding Ford Motor Company (NYSE:F) is high debt levels. Ford has an unsettling total debt/equity ratio of 6.59. A $50 billion company with $105 billion in debt is enough to scare off most investors. But, it really isn’t as bad as it seems. First, lets look at when Ford’s debt comes due (in billions)
2013 2014-2015 2016-2017 2018 and Beyond
26.37B 40.3 20.8 26.2
That’s a lot of money to pay off. But, Ford has 2 business segments, automotive and financial services. The financial services sector makes loans to individuals and dealers who want to buy Ford cars and trucks. Contractual payments due to Ford for the next few years (in billions) are as follows:
2013 2014 2015 2016 and beyond
41.5 14.353 10.05 11.82
All of those receivables, coupled with a gross cash position (cash/equivalents + marketable securities) of $24.3 billion, have assuaged my fears regarding Ford’s high debt levels.
Final foolish thought
American automakers are cheap right now, with both GM and Ford sporting P/E ratios below 10. Ford Motor Company (NYSE:F) clearly has the superior CEO in Alan Mulally, arguably the best CEO in the automotive industry. Additionally, Ford didn’t require nearly as much aid as GM to get through the recent financial crisis. Investing in a car maker warrants investigating Toyota. My investigation has led me to the conclusion that Toyota is much more expensive, relative to both net income and cash generated from operating activities, than Ford Motor Company (NYSE:F). High debt levels are a concern, but a strong gross cash position and a healthy influx of receivables over the next few years can let investors breathe easily. Ford is down for now, but won’t be for long.
The article Prominent Automaker Selling at a Discount originally appeared on Fool.com and is written by Ryan Palmer.
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