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It's no secret that the American auto industry is back with a vengeance. Just a few short years after the Big Three came groveling to Washington for bailout money, sales are up, the fat's been trimmed, and all three are turning a tidy profit. In the second quarter, Ford (NYSE: F  ) posted net income of $1 billion on over $33 billion in revenue; General Motors (NYSE: GM  ) turned a profit of $1.5 billion on over $37 billion in sales; and Chrysler, now owned by Fiat, recorded earnings of $436 million, following a $370 million loss last year.

But though these carmakers are firing on all cylinders once again, shareholders are still suffering. Both GM and Ford sit near 52-week lows and have rock-bottom P/Es, trading at forward valuations of 4.9 and 6, respectively. Some investors might assume that the whole industry is cheap, but that's not the case. Japanese rival Toyota (NYSE: TM  ) trades at a forward valuation of 13.2, and carries a market cap nearly four times that of GM or Ford, with around double the revenue of the two American automakers. Honda (NYSE: HMC  ) is also valued at nearly twice as much as GM and Ford, despite having lower sales. Even upstart electric-vehicle maker Tesla (Nasdaq: TSLA  ) , having never turned a profit, has excited market-watchers enough to warrant a market cap over $3 billion and a forward P/E of 62 with big hopes for its growth despite operating in a historically low-margin industry.

Lemon or cream puff?
There seem to be a few reasons that GM and Ford look so cheap. Investors tend to have long memories, and the auto bailouts are still fresh in the minds of shareholders. These were companies that just a few years ago led themselves into a ditch through bloated pension obligations and an inability to compete with the innovation and efficiency of Japanese automakers. Who's to say this won't happen again?

Well, GM has dramatically cut its labor costs, down to $1,606 per North American vehicle produced from $3,295 in 2005, and the company has reached a breakeven point in North America based on consistent market share of 10.5 million total vehicle sales versus 15.5 million in 2007.

While Ford never borrowed money from the government, it did take on a $23.6 billion loan in 2006 as the company saw the trouble on the horizon. Through negotiating new contracts with the United Auto Workers, overhauling the company culture, and shunting brands like Mercury and Volvo, the refocused brand is now stable and profitable.

Investors likely need to see both companies overcome weakness in Europe, and in GM's case, to see the government sell its stake, but the market's mistaken if it thinks these companies are anywhere near as vulnerable as they were five years ago.

The light at the end of the tunnel
What's particularly impressive about the turnaround in American automakers is that it's come without the usual robust recovery that follows a recession. The unemployment rate has lingered above 8% for nearly four years even though the historical average is closer to 6%, GDP growth has been minimal, and our trading partners -- in particular, Europe -- have been struggling.

Demand for autos may be cyclical, but ultimately they are an inelastic good, like gasoline, which is still consumed at high levels despite tripling in price over the last 10 to 15 years. Cars are a necessity, and consumers can only avoid shelling out for a new model for so long.

The average age of an automobile in the U.S. is now 11 years, the oldest it's ever been, which means the pendulum is likely to swing away from those years of sluggish demand as more cars go beyond repair. The car companies are aware of this, of course, and are making a big bet on a recovery. New-car sales in the U.S. are expected to hit 14 million this year, up from 11 million in 2009, and analysts expect them to grow by 1 million each year for the next few years. In 2000 and 2001, that number eclipsed 17 million, so the potential for a sharp increase is clearly there, given the population increase over that period.

Carmakers are ramping up for 2015 by leasing new cars at low prices in order to keep them in stock a few years from now when demand is up again. Several foreign competitors, including Volkswagen, Honda, Kia, and Hyundai, have doubled down on future U.S. demand, building or expanding plants in the states. The number of new models produced has nearly doubled in just a few years, and all that investment could also help speed the recovery.

If these premonitions become truth, GM and Ford would appear to be two of the best-positioned in the industry with their popularity domestically, and as stocks could be coiled springs for investors with their low valuation.

Foolish bottom line
No part of this resurgence is guaranteed, of course. The U.S. economy may not make a strong recovery. Europe may still be wallowing in the doldrums, and the eurozone could even disintegrate or lose some of its weaker members. The Chinese slowdown may be worse than expected, and tensions in the Middle East could send oil prices soaring again.

But the worst-case scenario in investing in Ford and GM seems to already be upon us as both stocks sit near two-year lows and continue to absorb huge losses from Europe. On the other hand, if the automakers are at all right about 2015, both stocks could easily double if not triple from here as their high operating leverage means those extra sales could translate into huge profit growth.

Whatever the future holds, you'll want to stay informed every step of the way. That's why I recommend that Ford shareholders, or prospective investors, get a copy of our brand-new premium report  that reveals whether this carmaker is "built to last." You'll get an in-depth look at the opportunities and risks the company faces as well as a year's worth of updates. Sign up now to get a step ahead of the competition, and save yourself the hassle of deciphering quarterly reports and other important developments affecting the share price. Just click right here and you can get started today.                                                                                         


Fool contributor Jeremy Bowman owns shares of General Motors. The Motley Fool owns shares of Ford Motor and Tesla Motors. Motley Fool newsletter services have recommended buying shares of General Motors, Tesla Motors, and Ford Motor. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (7) | Recommend This Article (9)

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 August 14, 2012, at 2:38 PM, mistacy wrote:

    At this stock price & the overall outlook for the company, it is a no brainer. Go Ford yourself.

  • Report this Comment On August 14, 2012, at 3:54 PM, jimmy4040 wrote:

    GM gets about 60-62% of it's profits outside the US, has gone back to extensive rebating, offered refunds until September to move cars, pads it's overall sales by listing those made by Chinese companies in which it has a minority interest, has already lost about half the invesment it made in Peugeot just a few months ago and has pension olbigations totalling nearly half it's market cap a figure seen nowhere else outside the airline industry!

    So what's not to like?

  • Report this Comment On August 14, 2012, at 4:00 PM, jimmy4040 wrote:

    Oh forgot to add that the government has about 28% of GM stock that has to hit the market sometime. Even if you like the company, until that is over, this is the ultimate don't buy.

  • Report this Comment On August 14, 2012, at 4:36 PM, Midas5280 wrote:

    I like Ford for a gain after about three months; I like Toyota for the long-term cause it is so well positioned for an energy crisis.

  • Report this Comment On August 14, 2012, at 9:38 PM, Viking70 wrote:

    "Just a few short years after the Big Three came groveling to Washington for bailout money..." Really? I was under the distinct impression that Ford did not ask for nor take any bailout money. Makes me wonder about the rest of the article.

  • Report this Comment On August 14, 2012, at 11:59 PM, lowmaple wrote:

    Viking70 Forf did not get bailout money but (not sure on details) got a guaranteed loan o fsome sort.

  • Report this Comment On August 16, 2012, at 9:09 AM, TMFHobo wrote:

    @Viking 70: Ford did not receive bailout money but its CEO did join those from GM and Chrysler on a trip to Washington to provide testimony to save the industry. The whole supply chain was at risk and Ford would've been doomed if GM and Chrysler went under.

    -Jeremy Bowman

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