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

Ford and General Motors have issued recalls while Fiat Chrysler has not, but which one is the best buy?

May 28, 2014 at 2:01PM

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.

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Andrew Sebastian has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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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