Which Automaker Looks to Be the Best Buy During the Recalls?

U.S. automakers Ford (NYSE: F  ) and General Motors (NYSE: GM  ) , along with Italian automaker Fiat (NASDAQOTH: FIATY  ) (which controls Chrysler), all have been dealing with recalls recently. The effect on their sales and earnings has not been equal, however.

Ford realizes declines due to recalls
Out of the three, Ford was the only automaker to experience a decline in sales in the month of April, with a drop of 1% in the number of vehicles sold year over year. Further, Ford reported a decrease in sales for the first quarter 2014 in the Americas. The number of cars sold in North America fell by 2% and Ford's revenue in the region declined by 5%. In South America, the number of cars sold decreased even more, by 8%, and South American revenue declined by a whopping 18%.

Ford's overall revenue increased less than 1% in the first quarter to $35.9 billion from $35.6 billion in 2013's first quarter. Its resultant income, however, fell by almost 39% to $989 million, equating to $0.24 per share. In its first-quarter 2014 earnings report, Ford noted that its recent recalls had a big impact on its earnings.

General Motors issues a huge recall, but sales increase
Unlike Ford, General Motors actually saw its sales increase in the month of April. The number of vehicles sold during the month rose by 7% despite the company's massive recall. General Motors' first quarter was also positive; it increased its sales a little over 1% to $37.4 billion. The recall did heavily affect General Motors earnings though; its EPS declined by 90% to $0.06 from $0.58 in 2013's first quarter.

Chrysler unfazed by recalls
Chrysler realized the biggest jump of the three in the number of vehicles sold in April, with an increase of 14%. For the first quarter of 2014, its revenue rose by a hefty 23% to $19 billion compared to 2013's first quarter. Furthermore, its market share jumped to 12.5% from 11.4% in 2013's first quarter.

Is now a good time to consider buying the automakers?

F Chart

F data by YCharts

Over the last three months, General Motors has declined by 5.42% and Fiat has fallen close to 5%. Surprisingly, Ford has risen over 3% over the last three months despite its falling sales in April and its diminished first quarter. Still, Ford looks like an attractive buy as its stock trades at a P/E ratio of 10. In comparison, the S&P 500 trades at a P/E of 18 and the broader auto manufacturer sector trades at a P/E of 14. Ford's cash flow, however, is expensive compared to the rest of the industry; the auto manufacturer's price to cash flow ratio is currently 5.2, while the broader automotive sector's is 3.8. On this basis, Ford's stock trades at a significant premium.

General Motors currently trades at a P/E of 18, which is equal to the market but more than its overall industry. General Motors is not a compelling buy on this basis, but it is not wildly overvalued either. On a cash flow basis, General Motors is richly valued with a price to cash flow ratio of 4.2; that's more than the industry's average of 3.8. Therefore, General Motors' cash flow is quite expensive compared to the rest of the industry.

Fiat, on the other hand, is slightly undervalued. Fiat's stock trades at a P/E ratio of 13, less than the sector's P/E of 14 and the broader market's 18. Therefore, Fiat looks like a decent buy at its current price on this basis, but perhaps not as decent as Ford. On a price to cash flow basis, Fiat trades at a P/CF multiple of 1.1, more than three times less than the industry average of 3.8. Compared to the industry, Fiat trades at a substantial discount considering its cash flow.

Foolish takeaway
The recalls have not affected all the automakers the same. Ford's sales have suffered the most, but General Motors' earnings have declined the most. Also, the valuations of the three companies diverge on an earnings and cash flow basis. Fiat seems to be the best buy out of the three automakers, with an attractive valuation on an earnings and cash flow basis. Further, the automaker has avoided recalls, unlike Ford and General Motors. For the latter, investors have to be careful going forward as the recalls can have lasting effects. They should closely watch the earnings and sales figures of all three automakers in the coming months to discern the ramifications of the recalls.

3 stock picks to ride America's energy bonanza
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 

Read/Post Comments (0) | Recommend This Article (1)

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2974213, ~/Articles/ArticleHandler.aspx, 8/29/2015 2:27:40 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Andrew Sebastian

Today's Market

updated 5 hours ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:01 PM
F $13.74 Up +0.18 +1.33%
Ford CAPS Rating: ****
FIATY $0.00 Down +0.00 +0.00%
Fiat S.p.A. (ADR) CAPS Rating: ****
GM $29.00 Up +0.42 +1.47%
General Motors CAPS Rating: ***