Finding Value in 2014: Automakers

Low forward P/E ratios coupled with worldwide growth potential make these automakers value picks, even after the 2013 rally.

Jan 5, 2014 at 10:47PM

In continuing my series on how investors can still find quality stocks at a good value, I have identified the automotive industry as one still generally trading at reasonable multiples.

Combined with the growth potential the industry could see over the next several years from an economic recovery and emerging markets growth, I think these stocks are worth a look for the portfolios of income and growth investors alike.

The American and worldwide giant
Since undergoing a government-organized restructuring back in 2009, General Motors (NYSE:GM) has carried the marks of shareholders destruction alongside its frequently politicized restructuring history. Although the "government motors" label was quickly given to GM and is still sometimes used by opponents of the auto bailouts, the U.S. government sold the last of its GM shares at the end of 2013, opening up the potential for new shareholder-friendly initiatives.

With around $27 billion in cash, GM has a lot of options available for itself. The instatement of a dividend for the first time since the old GM was reorganized is widely expected. This move would help to attract dividend-only funds, income investors, as well as rewarding existing shareholders. Share buybacks could also be in order. With GM shares trading at only 8.5 times forward earnings along with expected earnings growth over the next several years, GM would be repurchasing shares at a good value.

Moving forward
With the S&P 500 now trading around 17 times forward earnings, shares of Toyota Motor (NYSE:TM) offer an attractive play in the automotive sector. While a little more expensive than GM based on a forward P/E ratio (8.5 times vs. 9.7 times), Toyota has a more stable history and its shareholders suffered far less in the last downturn. Additionally, Toyota pays shareholders a dividend yielding 2.1% and has a good record of doing so making this value investment suitable for part of an income portfolio.

An extensive line of hybrid vehicles has also given Toyota a hedge against a potential rise in oil prices. As automakers relying on big SUVs for their profits were hurt during the 2008 spike in oil prices, the Toyota Prius was in high demand and the automaker's other small cars were rolling off dealership lots. With oil prices still susceptible to economic and political factors, having an effective means of generating earnings even in the event of a sharp rise in oil prices makes Toyota a more conservative value investment.

Eurozone discount
The S&P Europe 350 index has significantly lagged the S&P 500 over the past year as many investors have remained hesitant to buy into the economically troubled region. This has created what I call eurozone discounts on some stocks.

One automaker I see as undervalued from the eurozone discount is Volkswagen (NASDAQOTH:VLKAY). I also see this stock as one of my favorite eurozone investments, highlighting it in another article called "Finding Value in 2014: Europe." Not only does Volkswagen trade for a single-digit forward P/E ratio, but the stock also trades at a cheaper price-to-book value than many large automotive rivals.

Considering Volkswagen's worldwide footprint and growing presence in emerging markets, the eurozone discount seems unjustified. As the eurozone disappears during Europe's recovery and Volkswagen's earnings increase from greater worldwide sales, shares could have significant upside potential in addition to the current dividend yield of 1.7%.

Auto savings and growth
Despite major growth potential in emerging markets and the beginnings of a worldwide economic recovery, many automakers trade at a significant discount to the S&P 500. While General Motors, Toyota, and Volkswagen are some of my top picks for this industry, I see strong upside for the industry as a whole and remain bullish on Ford, Fiat, and Tata Motors as well. But even as value stocks, growth may be what drives these investments forward.

U.S. automakers boomed after World Wwar II, but the coming boom in the Chinese auto market will put that surge to shame! As Chinese consumers grow richer, savvy investors can take advantage of this once-in-a-lifetime opportunity with the help from this brand-new Motley Fool report that identifies two automakers to buy for a surging Chinese market. It's completely free -- just click here to gain access.

Alexander MacLennan is long January 2015 $34 and $40 calls on General Motors and is also long General Motors Class B and C warrants. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security.

The Motley Fool recommends Ford and General Motors and owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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