Is Toyota a Better Buy Than Ford?

It's hard to argue with success, and Ford (NYSE: F  ) has had a lot of it lately:

Great stuff, all of it. CEO Alan Mulally's daring turnaround of the Dearborn-based giant will be the subject of business-school case studies for decades. And the company's stock price has shown its approval, increasing sevenfold since being left for dead in early 2009.

Ford's fans and shareholders clearly have had a lot to be happy about in the last year. And notwithstanding that 650% run, I think Ford is still an intriguing buy at current levels. After all, its turnaround -- like the economy's recovery -- still has considerable room to run, and its stock should continue to reward patient investors.

But is it the best automotive buy right now? Might there be another global giant still in the early stages of its own turnaround, one that might yield even greater rewards over the next few years?

Nope, I'm not talking about General Motors' upcoming IPO. I'm talking about Toyota (NYSE: TM  ) .

Buy Toyota now? Are you serious?
Toyota was a growth juggernaut (at least by auto company standards) for years, but its well-publicized troubles of the last year have put a significant dent in its armor, taking its stock price from $90ish to its current levels around $70. A big incentives push helped U.S. sales earlier this year, but recent results show them in third place in this market, well behind General Motors and Ford.

Further evidence that the Toyota brand has been damaged came last week, when the most recent J.D. Power Initial Quality Study showed Toyota in 21st place, a shocking drop attributed in part to perceptions emanating from the recalls earlier this year. That's a problem: Toyota's products have a reputation for being boring but reliable, and that reliability has been a key -- maybe the key -- selling point. Having (for the moment, anyway) ceded the quality crown to rivals like Ford and Honda (NYSE: HMC  ) has forced the company into a major rethinking of their approach.

So their stock price has fallen due to problems, but management seems to be taking steps to address those problems. Does that add up to an opportunity?

Toyota as an investment
Auto stocks, of course, are cyclical stocks -- they tend to move through boom-and-bust cycles. One indicator that experienced cyclical-stock investors tend to look for is a high price-to-earnings ratio. That may be counterintuitive for those coming from a value-investing standpoint, but here's the reasoning: Earnings on cyclical stocks tend to make more extreme swings than their stock prices do. A good company with a crazy-high P/E ratio might be near a cyclical low -- warranting further attention.

By that measure, Toyota's a great candidate, with a P/E around 50 at the moment (Ford's, by comparison, is around 7). Unlike a lot of automakers, Toyota has a long track record of profits -- the company's 2009 fiscal year, which ended March 31, 2009, was their only unprofitable year in the last 72 years -- and the company made a strong recovery in 2010. Likewise, Toyota's debt load is reasonable, and their Standard & Poor's credit rating is an exceptionally solid (by industry standards) AA.

What's more, Toyota's management is taking steps to learn and move on from the hard lessons of the last couple of years. Global efforts to improve quality, manage growth more effectively, and make their products more exciting and desirable may incur costs in the short run, but should pay off over time.

So what's the upshot?
Toyota, despite its recent woes, is kind of the beige Camry of stocks: While it'll follow cyclical cycles, it isn't likely to let you down -- but it isn't likely to rock your socks, either. Assuming that the company will improve its position in key markets like the U.S. and China as the recall scandals disappear in the rearview mirror, the stock seems likely to appreciate slowly over time as the global economy continues to recover. I don't think we're looking at a dramatic turnaround-driven bounce anytime soon.

That slow-but-steady appreciation, coupled with a modest dividend, might make it appealing to some -- if you've ever wanted to own Toyota, now seems like a great time to buy -- but if that's the kind of stock you want, I'd argue that you'd be better off skipping the cyclicals and going with a solid big-name blue-chip instead. Johnson & Johnson (NYSE: JNJ  ) , a well-managed gem in the recession-resistant pharma space, offers a steady upside together with a take-it-to-the-bank 3.6% dividend yield. Ditto consumer staples star Procter & Gamble (NYSE: PG  ) with its 3.1% dividend yield. If you're looking for big-name stability during uncertain times with good future prospects, why would you choose Toyota over either of those?

Meanwhile, what of Ford? I'm a fan of the company (and a shareholder), but there's an argument to be made that it's somewhat overpriced at the moment -- for a new investor, in other words, the ship might have already sailed. I'm not sure I agree with that: Ford's turnaround (and its stock's performance) has been exceptionally impressive, but there's still a long way to go before we can pronounce this company fully recovered.

Assuming that Ford continues to pay down its mortgaged-to-the-hilt debt load, and its domestic sales success and overseas growth continues, Ford's stock should continue to deliver solid results for a while yet. Put another way, Ford's probably a riskier buy than Toyota, at least on paper -- but chances seem good that patient investors will be well-rewarded for that risk in coming years.

Read more Foolish auto coverage:

Fool contributor John Rosevear owns shares of Ford. Ford is a Motley Fool Stock Advisor choice. Johnson & Johnson and Procter & Gamble are Motley Fool Income Investor picks. Motley Fool Options has recommended buying calls on Johnson & Johnson. The Fool owns shares of Procter & Gamble. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (18)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 22, 2010, at 5:02 PM, Varchild2008 wrote:

    Anyone that buys TM right now and expecting it to outperform (F) Ford is someone that I'm happy I'm not.

  • Report this Comment On June 22, 2010, at 5:27 PM, spawn44 wrote:

    Ford's good but. Stock is going well but. Same story different analyst. Right now Ford is kicking Toyota's rear end. The stock is very cheap relative to Toyota. There is no question in my mind where to put your money.

  • Report this Comment On June 22, 2010, at 5:31 PM, bossbill wrote:

    Buy Ford. By Toyota.

  • Report this Comment On June 22, 2010, at 5:37 PM, badkat7 wrote:

    While Toyota will certainly recover, it is hard to recommend them because the problems associated with the recall are systemic. I see no indication these have been fixed despite their claims to the contrary. In addition the line up of models is generally uninspired. They don't have a viable diesel to compete with VW, they have no sports cars to act as flag ships or enticers, they are synonymous with DULL. Toyota need to replace their mangement and change the culture that has brought them low; basically someone needs to "own" Toyota and make the range, type and quality of car his or her personal responsibility. Until then I believe Ford has a greater depth or pool from which to draw. Several superb European cars and several very appropriate Asian cars. Indeed the most disadvantaged market is the American marketplace due to poor product matching. So I'm voting Ford with my purchases around the $10.50 mark.

  • Report this Comment On June 22, 2010, at 6:29 PM, Melaschasm wrote:

    I think this article is about two years to early. TM will need at least a year or two for the quality control and quality perception to turn around.

    On the other hand, F is at the begining of a cyclical upswing that will likely take a couple years to play out. The one really big danger of owning Ford is the possibility of a deep second dip hurting vehicle sales while Ford still has a huge pile of debt.

  • Report this Comment On June 22, 2010, at 6:30 PM, tquinn2 wrote:

    What has amazed me is that even during the height of the problems, when Obama's people were beating them up, and Toyota had more bad news every day, except for the initial plunge from pretty lofty levels, its stock price seemed to resist further drop. And when it recently was shown that they have fallen off the perch as quality leader, it only dropped a little more. It really hasn't fallen as far as you would expect, given all of the bad news.

    Something about this reminds me of people owning a stock not because of its fundamentals, but because they have fallen in love with a company, and cannot face the brutal fact that it has real problems. Kind of like Worldcom.

    I believe it is still very dangerous to own this stock, which is why I sold at 77, and have no interest in getting back in at where it is.

  • Report this Comment On June 22, 2010, at 9:08 PM, jm7700229 wrote:

    The logic here is weak. If the market expects cyclical swings and therefore tolerates a P/E of 50 (50!!) when profits are down, then why would we expect the price to go up when profitability cycles up? If profits double, it's still a P/E of 25; hardly a value stock.

    Ford isn't out of the woods yet -- there's still a lot of anti-U.S. auto bias around. But a P/E of 7 takes a lot of potential trouble into consideration, and Ford's been beating Toyota on longer term reliability tests for yeas (as have Buick and Cadillac).

  • Report this Comment On June 23, 2010, at 2:21 PM, baldheadeddork wrote:

    tquinn2 - Amen. When you look at the costs of the recall, the drop in their market share, and the much higher cost of incentives on the cars they are selling - it's hard to believe that the market has priced all of that in to the current price. I think you're dead right. People are either buying this stock or hanging on to it based on what the company was five and ten years ago.

    A share of stock is really worth whatever someone is willing to pay for it, of course, but Toyota has some bad quarters ahead of it. And if they're serious about getting back to what made them great, that's going to take years. Maybe the market supports this price if revenues and profits slide by 10-30% as the rest of the market recovers. But I don't want to bet my money on it.

  • Report this Comment On September 13, 2010, at 12:13 PM, aiyanalunette wrote:

    I recommend using <a href="http://www.1800autoland.com/">NJ Toyota</a> check them out at http://www.1800autoland.com

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