The automobile industry is comprised of companies that design, manufacture, engineer, assemble and market automobiles and motorcycles. It is expected higher demand in emerging markets such as China, so with this positive outlook let's take a look at two companies in this highly cyclical industry.
General Motors Company (NYSE:GM) designs, builds and sells cars, trucks and automobile parts. The company also provides financing services through General Motors Financial Company, Inc. The company’s automotive operations are conducted through four segments: GM North America (GMNA), GM Europe, GM International Operations and recently added GM South America.
The Largest Automobile Market in the World
The company´s focus is to boost its sales on the emerging markets (Brazil, China and India). In China, the firm plans to invest heavily in new plants and increase production to 5 million vehicles by 2015. With this effort, General Motors expects to triple its vehicle exports from 100.000 to 300.000 units. Additionally, the automaker received permission from Chinese authorities to build a $1.3 billion plant to manufacture its Cadillac model, to gain insight in the luxury-car market of that country: "We've decided that the luxury market is going to grow and we want a bigger share," said Dayna Hart, a spokeswoman for General Motors in China.
General Motor´s is minority-owned by the U.S. government, with stakes held by the Canadian government, GM creditors and the United Auto Workers (UAW). The company and the UAW reached an agreement for about 48,500 workers. The deal includes improvements in both health-care coverage and profit sharing for its workers, making a package of concessions designed to reduce General Motors' labor costs. It is expected to save about $3 billion a year.
In terms of valuation, the stock sells at a trailing P/E of 10x, trading at a discount compared to an average of 15.2x of the industry. Analysts’ expectations imply a forward P/E of 7.67. At that P/E it seems cheaper compared to the industry average.
A Perfect Ally
Honda Motor Co. (NYSE:HMC) and its subsidiaries are engaged in the development, manufacturing and distribution of motorcycles, automobiles, power products, and also provision of financing for the sale of those products. Automobile sales accounted for 78% of total segment sales in FY 13 (March), while motorcycle sales contributed 13.6% during the same period.
Long-Term Master Agreement
Honda and General Motors aim to co-develop next generation fuel cell system and hydrogen storage technologies by 2020. The deal expects to succeed by sharing expertise, economies of scale and common sourcing strategies. McKinsey & Co. estimates that by 2050, this “Electric Cars” could account for as much as 26 percent of all vehicle sales. Toyota and Mercedes-Benz have also both announced a strong interest in hydrogen vehicles.
Late to React
Honda missed the Chinese’s recent booming demand for cheap cars and in July, the company announced plans to launch 10 new models in China by 2015 to double its sales volume. It also announced plans to invest $435 million to build a new assembly plant in Brazil, which will double its manufacturing capacity in that country where is still far away from the principal players (Volkswagen, Fiat and General Motors).
Its P/E multiple on a trailing-12 month basis is 19.5 and the forward P/E multiple is 11.36. The current dividend yield is 2.36%, which is quite good to protect the purchasing power.
Finally, I always like to see of one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: The return on equity.
|Company||ROE||ComparedtoIndustry Mean (=8.2)|
It is very important to understand this metric before investing in a high-growing company.
It seems difficult to decide which one of these companies will perform better in the future. However, for all that we have seen in the article, I prefer General Motors. Apart from the “green-agreement”, the prosperity in emerging markets, led by China, should drive global demand growth, and the company has good, promising plans in that region.
Hedge fund gurus like Ken Heebner, Steven Cohen and Jean-Marie Eveillard added this stock to their portfolios, and I would advise fundamental investors to consider adding this stock to their portfolios as it seems to be an attractive option for investors. The fact that Warren Buffet holds position in the company provides me with an extra quota of optimism.
Disclosure: Victor Selva holds no position in any stocks mentioned.
- Jean-Marie Eveillard Undervalued Stocks
- Jean-Marie Eveillard Top Growth Companies
- Jean-Marie Eveillard High Yield stocks, and
- Stocks that Jean-Marie Eveillard keeps buying
- Ken Heebner Undervalued Stocks
- Ken Heebner Top Growth Companies
- Ken Heebner High Yield stocks, and
- Stocks that Ken Heebner keeps buying