What are the best-run companies in the automotive sector?
Near-term concerns about auto sales have pushed prices of many auto companies' stocks down to value levels. But not all value-priced companies are good buys. Genuine value stocks, the ones worth holding for a long time, have great management teams that position their companies for future gains while acting with the interests of shareholders in mind.
So, what companies in the automotive sector qualify as among the "best-run"? Our contributors think Toyota Motor Corporation (NYSE:TM), driver-assistance tech company Mobileye N.V. (NASDAQOTH:MBBYF), and -- believe it or not -- General Motors (NYSE:GM) all have terrific management teams that make them strong candidates for a closer look from investors. Here's why.
This Detroit "dinosaur" is now a rising high-tech giant
John Rosevear: Even as recently as five years ago, the idea that General Motors -- General Motors! -- would be at the forefront of the fast-moving technological changes coming to the auto business seemed far-fetched. But if now-retired GM CEO Dan Akerson is remembered for nothing else, he should be remembered for this: The former telecom executive recognized the disruptive potential of Tesla Motors' (NASDAQ:TSLA) Model S much earlier than most of his peers, and he put GM on course to disrupt itself before Silicon Valley did.
That's one reason GM has a $30,000 electric car with 238 miles of range coming to market in a matter of weeks, while all of its rivals (including Tesla!) are still working on comparably priced long-range electrics. (Or in some cases, just talking about them.) But there's more, because Akerson's hand-picked successor, Mary Barra, has taken what Akerson started and pulled GM ahead on other fronts. Did you know that GM has a car-sharing subsidiary called Maven that's rapidly becoming a high-tech rival to ZipCar? Or that GM owns 9% of ride-hailing start-up Lyft and has a seat on Lyft's board? Or that GM and Lyft will soon begin a pilot program in which self-driving electric Chevrolet Bolts will ferry Lyft customers?
GM's positioning for the future is just one part of what Mary Barra and her top-drawer management team have accomplished. Barra and CFO Chuck Stevens talk about metrics like "return on invested capital" that were practically a foreign language to past GM leaders. They emphasize profitability over sales and market share, another sea change from Old GM, and prioritize returning excess capital to GM shareholders. And importantly, all of this talk has been backed up by positive actions taken over the last few years.
Not only is today's GM a solidly profitable company paying a fat (and rock-solid) dividend, but Barra even has this century-old Rust Belt dinosaur on track for significant bottom-line growth over the next several years. A series of initiatives ranging from taking much better advantage of GM's vast global scale to a radical build-out of its old luxury brand, Cadillac, have GM on track to boost its adjusted pre-tax profit margin to the neighborhood of 10% by early next decade. GM's margin in 2015 was 7.1% on $152.4 billion in revenue; do the math on that, and you'll see we're talking about a (very plausible) 30% increase in profit over the next five to seven years. Not bad for a dinosaur.
Long story short: Turning around a struggling company is one thing. Turning around a company that was as much of a mess as GM was is another thing entirely. Barra, Stevens, and the rest of GM's leadership team have already transformed GM, accomplishing a management feat many thought was impossible -- and they've just begun.
Driverless cars are coming
Daniel Miller: If you're unfamiliar with the acronym "ADAS," or Advanced Driver Assistance Systems, go ahead and memorize it, because you'll be seeing it often over the next two decades. The automotive industry is putting the pedal to the medal on researching and developing driverless vehicles, and Mobileye has proven it's a well-run global leader with management highly aligned to the company's objectives.
For those unaware, Mobileye is a leader in the development of computer vision and machine learning, data analysis, localization and mapping for ADAS and other autonomous driving technologies. Its products are going to be increasingly critical for driverless vehicles to detect roadway lanes, barriers, and other visual landmarks. Mobileye products are integrated into vehicles from roughly 25 automakers around the globe.
One factor investors should love about the well-run company is that management is aligned with the company and its investors. Mobileye is run by two company co-founders, Professor Amnon Shashua, also chief technology officer and chairman of the board, and Ziv Aviram, president and chief executive officer. Each co-founder currently owns roughly 8% of outstanding equity in Mobileye. Also, both have signed non-compete agreements that will keep them from competing against the company for 18 months if either were to leave it.
In terms of its business, the past half-decade has been nothing short of impressive growth. Mobileye's revenue has moved from $19 million in 2011 to $240 million in 2015. Meanwhile, gross profit has moved from $12 million to $179 million during the same time period. Morningstar even estimates Mobileye's return on invested capital to be an extremely high 40%.
Despite being linked to the capital-intensive auto industry, the company's own business model isn't quite as capital-intensive, which makes its margin potential much higher than what the auto industry typically offers investors. Further, as the auto industry drives toward a world of ADAS vehicles, the company is well-positioned to continue its break-neck top-line growth over the next decade or two. If the company can continue innovating products for ADAS vehicles, it should be a fun ride for investors.
The best -- by the numbers
Rich Smith: What is it exactly that makes a company "best-run?" To me, this seems like more of a subjective than objective question. So, let's see if we can try to quantify it a bit.
When judging the companies by the numbers, Toyota Motor Corporation scores a 3.9 for employee satisfaction out of a possible five stars on Glassdoor.com. Toyota ranks ahead of both General Motors and Fiat Chrysler (3.7), ahead of Honda of America at 3.5, and just short of Ford Motor Company's stellar 4.0 rating. On the other hand, when judging the quality of top leadership, Glassdoor employees give the edge to Toyota, with 93% of employees polled saying they "approve of" CEO Akio Toyoda. That's one percentage point higher than the percentage of Ford employees who approve of Ford CEO Mark Fields.
Other numbers support the employees' view, with the most objective numbers an investor can consult -- the profits a company reports -- arguing in Toyota's favor. Out of the five U.S.-listed automotive stocks mentioned above, Toyota Motor boasts the best gross profit margin -- 24.5%, or nearly two percentage points ahead of No. 2 Honda. Toyota also earns the highest operating profit margin, 10.1%, which is nearly twice the best number produced by its rivals. If the business of business is to earn big profits on their sales, then Toyota is doing the best job here as well.
And of course, there's the big number: Market capitalization. Warren Buffett tells us that "in the short term, the market is a popularity contest; in the long term, it is a weighing machine." Objectively speaking, then, it stands to reason that no matter how popular a company is, the "best-run" company in any sector is probably the one with the biggest market capitalization.
According to the latest quotes from S&P Global Market Intelligence, Toyota's $169.7 billion market cap is bigger than the market caps of Ford, GM, and Honda combined. When you get right down to it, then, this contest isn't even close. Toyota is the biggest...because it is the best-run.
Daniel Miller owns shares of General Motors. John Rosevear owns shares of General Motors. Rich Smith has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Tesla Motors. The Motley Fool recommends General Motors. 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.