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This Undervalued Car Company Is a Buy: Ford (F), General Motors (GM) and More
Posted by: mdhargrave (IP Logged)
Date: March 21, 2013 05:00PM

General Motors Company (GM) appears to be quite a value play. The company doesn't pay a dividend, but easily could, and the the car maker has made significant restructuring efforts to clean up its balance sheet and better position operations to capitalize on an expected increase in vehicle demand. Comparing the company to major U.S. and overseas peers and the stock could easily be undervalued by as much as 65%.

GM expects to see its future growth generated from emerging markets, yet, the U.S. auto market will also help drive the company higher. The U.S. market is expected to continue growing in 2013, with S&P estimating the sale of light vehicles to reach 15.4 million in 2013, up from 14.4 million in 2012. Part of this demand increase will be due to the fact that the average age of vehicles on the road exceeds 11 years old, which has been a result of purchase postponements during the weak economy.

GM also has a relatively sturdy balance sheet with cash of $18 and debt of $16 billion. What's more is that the car maker doubled its credit facility near the end of 2012 to bring its total cash and credit available to $42 billion. Part of this excess cash will go toward repurchasing 200 million shares from the U.S. government for $5.5 billion, reducing the U.S. Treasury's stake in the company from 26.5% to 19%.

One of the biggest issues for carmakers is their ability to innovate; as a result, there is inherent risks with every car maker that involves innovation. As a result, GM plans to refresh 80% of its model lineup by 2014, which includes rolling out a new light truck platform, replacing its current seven year old GMT900 platform.

The other notable growth opportunity for GM is China. Chinese auto sales more than doubled from 2007 to 2012, going to 15.5 million from 6.7 million, making the country the largest auto market globally. What's more is that the Chinese auto market is expected grow by 10% in 2013, compared to only 8% for the US market.

Ford Motor Company (F), unlike GM, does pay a dividend, one that yields 2.97%. However, one big disadvantage to Ford is that its China market share is only around 3%, while GM's is closer to 15%. Ford also saw cash flow from operations decline by 33% in 2012 on a year over year basis, and expects the pre-tax operating profit to remain flax in 2012.

What About Its Japanese Counterparts?

Honda Motor Co Ltd (HMC)
has the most exposure to North America among the major Japanese automakers. Ward's Automotive Reports states that Honda's U.S. market share rose from 9% to 9.9% in 2012; this is a positive for the company, but the real growth story lies in emerging markets, thanks to rising prosperity in these regions.

Recent performance has also been poor for Honda. December-ended quarterly results showed that earnings came in at $0.53 per share, compared to $0.34 for the same quarter last year, but still well below consensus of $0.62. This makes the fourth quarter in a row that the company has missed consensus EPS estimates by 15% or more.

Toyota Motor Corporation (TM) is still struggling from a slightly tarnished brand name. Toyota has been hit with a string of recalls that have impacted it performance of late and could well be a drag on the company through the near future. Since late 2009, Toyota recalled over 15 million vehicles across a total of 20 recalls, which is greater than any other automaker. The company was also fined $17.3 million in 2012 by the U.S. Transportation Department for late responses related to vehicle defects. The car company missed consensus December-ended quarterly EPS by 35%, and has seen 2013 consensus earnings expectations lowered by 11% over the past three months.

Dividend & Valuation

Although GM doesn't pay a dividend, the car company easily could. Ford pays out 28% of its earnings in the form of dividends, which is a 2.97% dividend yield. If GM were to pay a dividend with a similar payout as Ford, then its dividend yield would also be 2.9%.

On an EV/EBITDA multiple basis, GM trades at only 1.4 times, however, Ford is at 6.8 times. Applying a 6.8 times multiple to GM's EBITDA and there could be upside of over 200% for GM. What's more is that GM trades below Ford and other major car companies on a price to sales multiple basis:

Price to Sales
  • GM 0.3 times
  • Ford 0.4 times
  • Honda 0.7 times
  • Toyota 0.7 times
Assuming that GM should trade more in line with its Japanese peers, at 0.7 times, the stock is undervalued by as much as 180% based on analysts' 2013 sales estimates.

Don't Be Fooled

After its bankruptcy, GM has undergone notable restructuring and now has a much healthier balance sheet and a plan for international expansion. The industry tailwinds are aligned to help propel all the major car companies, but I believe that GM has the best chance of seeing better than expected returns given the fact that the company is undervalued. Another notable factor not baked into the stock is the potential for a dividend payout.

Be sure to check out our detailed stock analysis (click here).


Stocks Discussed: GM, F, TM, HMC,
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