Which American automaker to choose?
In my eyes, both Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM) are cheap right now. They both sport P/E ratios below 10, while at the same time Toyota Motor Corporation (ADR) (NYSE:TM) has a P/E ratio of 47.06! GM has the best margins in the industry, perhaps what attracted Warren Buffet, but Ford Motor Company (NYSE:F) strikes me as a superior company for two reasons. First, during the federal governments bailout of the automotive industry, Ford Motor Company (NYSE:F) received $5.9 billion to modernize some of its plants. On the other hand, the federal government had to invest over $50 billion to bail out GM. Personally, I’d rather own the company that needed less assistance during a crisis. The other concern I have with GM is the instability they have at the CEO position. Over the past 5 years, GM has had 3 different CEOs. At the same time Ford Motor Company (NYSE:F) has had the same man at the helm for the past 6 and a half years. He is one of the most talented CEOs out there in any business. In fact, he’s so talented he deserves a paragraph all to himself
Alan Mulally, an investor’s dream
You can analyze past performance by examining financial statements in a process that’s not all that difficult. On the other hand, predicting the future accurately is impossible. It’s a shame since, as a potential owner, your primary concern is future performance. Fortunately, there are signals that can give you an idea as to what the future holds for a company. One of the surest signs of a bright future is a topnotch CEO, and Ford has that in spades. Having Alan Mulally leading your company provides a sense of security. Before coming to Ford, his talents were employed by Boeing, and boy did that stock soar while he was there! Between 1994, the year Mulally was put in charge of all airplane development activities at Boeing, and September 2006, when he resigned as CEO of Boeing’s commercial airline segment, the stock nearly quadrupled. He achieved this kind of success by running a tight ship. Tales of executive frugality, in situations that do not affect customers, are always a good sign. During the hearings for government loans in Washington, he was initially rebuked in the press for traveling to the hearing in a corporate jet. Not one to waste the shareholders money, Mulally drove to the next hearing in a Ford brand hybrid all the way from Detroit. Additionally, he sold all but one of the company’s corporate jets. Ford is led by a man with an astounding track record who prioritizes increasing shareholder value over a fancy jet that only benefits executives.
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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