Which Auto Stock Is the Cream of the Investment Crop?

Automobile recalls are tracking at a record-breaking pace, but with consumers still needing new cars, recent losses might create a good opportunity.

Jun 11, 2014 at 9:31AM

The recall volume from top automotive manufacturers so far in 2014 has been epic, in a deeply negative way, and has adversely affected sales growth for several of the industry's top companies. General Motors (NYSE:GM), Ford (NYSE:F), and Toyota (NYSE:TM) have all struggled thanks to their respective roles in the recall numbers. But, with pent-up demand for vehicles still present, are recall leaders now attractive, and if so, which is best?

The quintessential face of recall
General Motors has had enough controversy in 2014 to last a decade, with 2.6 million recalls for vehicles with defective ignition switches that have been connected to about 2,000 injuries and at least 13 deaths. The automaker's total recall count for the year is much larger, and many investors have feared long-term consumer backlash toward General Motors.

Investors have been largely correct in this worry, as the company's U.S. sales fell 2.3% in the first four months of 2014 versus a rise of 1.5% in the overall market. While General Motors may have the most recalls of 2014, but it's in no way alone. So far this year, more than 20 million vehicles in total have been recalled in the U.S., with hefty contributions from Ford and Toyota.

A surprising May to start the summer
With that said, despite the public relations nightmare, auto sales were projected to have a strong May and perhaps a solid summer season. Kelley Blue Book estimated a 6.7% rise in new vehicle sales to 1.54 million units, which would have given the industry its best May since 2007, catapulting the seasonally adjusted annual rate, or SAAR, to slightly more than 16 million units.

While these estimates appeared bullish, they were far off the actual numbers. Notably, new car sales rose to 1.6 million units in May, and the SAAR is now tracking well above 16 million. That 7%-plus rise in sales year over year is a reflection of both the first summer holiday weekend and pent-up demand from consumers.

Where's the sales strength and investment value?
General Motors, which had lagged all year, saw May sales rise 12.6% year over year, which nearly doubled analyst estimates. This growth was significantly better than Ford's 3%, but not nearly to the level of Toyota's 17% sales increase.

Still, with General Motors' stock lower by 14% this year and seeing a recovery of sorts, might it be time to buy the stock?

Clearly there are many concerns with General Motors, but given the complexity of the recalls and its public image, there's a good chance that the automaker learned from its mistake. Sales in May certainly indicated that consumers are starting to roll back into GM. Therefore, the question of investment becomes about valuation.


General Motors



Forward P/E Ratio








2014 Expected Revenue Growth




2015 Expected Revenue Growth




All data derived from Yahoo! Finance.

As you can see in the table, General Motors is cheaper than Ford and Toyota in all categories. Not to mention, its revenue growth is expected to be more consistent going forward. In terms of revenue, there are a lot of factors at play for auto manufacturers, such as incentives and pricing, which is why units sold aren't always a reflection of revenue growth. Thankfully, incentives across the industry were less excessive in May, which further adds to the notion that demand has risen.

Final thoughts
In looking at General Motors from a valuation and operating perspective, it definitely appears to present a good investment opportunity, perhaps the best within the space. In the past, shares likely suffered from the government's large, post-bankruptcy stake in the company, along with its continuous selling of shares, not to mention GM's inability to pay a dividend. However, those days are long gone, and investors should start to expect a much more shareholder-friendly General Motors.

The recalls are no fun for both the company and the consumer, but in a macro sense, we have seen improved vehicle pricing and a boost in Europe's sales, rather than extravagant losses. Therefore, given recent stock declines, now might be the best time to initiate a long-term position in the auto space, and GM's valuation could make the automaker the cream of the crop.

You can't afford to miss this
"Made in China" -- an all too familiar phrase. But not for much longer: There's a radical new technology out there, one that's already being employed by the U.S. Air Force, BMW and even Nike. Respected publications like The Economist have compared this disruptive invention to the steam engine and the printing press; Business Insider calls it "the next trillion dollar industry." Watch The Motley Fool's shocking video presentation to learn about the next great wave of technological innovation, one that will bring an end to "Made In China" for good. Click here!

Brian Nichols owns shares of Ford. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers