General Motors'(GM -0.91%) stock has a lot going for it: GM is selling huge numbers of high-profit trucks and SUVs today, and it has emerged as a leader in the key technologies (self-driving, electric cars) that will drive profits for automakers.
But how does it compare with Toyota Motor Corporation (TM -0.54%) as an investment? Toyota is an innovation powerhouse as an early leader in green auto technologies that is renowned for its low-cost manufacturing and consistently high quality.
For investors looking to put new money to work today, which one is the better buy?
Toyota is the world's leading maker of gasoline-electric hybrid cars. But it has been slow to embrace fully electric vehicles. Image source: Toyota Motor Corporation.
By the numbers: Toyota versus GM
Here's how the two auto giants compared on some key measures over the last four quarters.
| Metric | Toyota | General Motors |
|---|---|---|
| Vehicles sold | 10.3 million | 9.8 million |
| Earnings before interest and tax (EBIT) | $17.95 billion | $12.0 billion |
| EBIT margin | 6.9% | 7.7% |
| Earnings per share | $11.39 | $5.81 |
| Price-to-earnings ratio | 11.2 | 7.2 |
| Dividend yield | 3.15% | 3.72% |
Data sources: Toyota, General Motors, Thomson Reuters. Sales totals are for the last four quarters combined and include sales by unconsolidated joint ventures in China. Financial figures are for the period beginning on Oct. 1, 2016 and ending on Sept. 30, 2017. EBIT excludes the impact of one-time items. Results for General Motors exclude costs and charges related to the sale of Opel AG.
Toyota sells more vehicles than GM, and generates more revenue and profit. Both pay solid dividends that should be sustainable through a moderate recession. Both also have strong, stable management teams that have the companies moving generally in the right directions. Toyota CEO Akio Toyoda and GM CEO Mary Barra are both strong leaders who have made good moves to cut costs and position their companies for the future.
In other words, GM and Toyota are both healthy, well-managed global auto giants. But GM's profit margin is somewhat fatter than Toyota's, and its valuation is somewhat lower. That seems worth a closer look.
Toyota and GM: Potential for profit growth
Both Toyota and GM are global giants, rivaled in scale only by Volkswagen AG (VWAGY -0.58%) and the "alliance" of Nissan and Renault. Toyota dominates its home market of Japan, has a major presence in North America, a growing presence in China, and a small presence in Europe. GM dominates its home market of North America, is one of the two biggest-selling automakers (with VW) in China, and has little to no presence in Japan and Europe.
But which company is better-positioned for growth? GM's management has recently argued (persuasively) that it it is positioned for significant profit growth over the next several years, for several reasons:
- GM is a leader in self-driving technology, and expects to launch thousands of self-driving vehicles in ride-hailing service in 2019 -- likely before any other company.
- GM was the first to launch a mass-market long-range electric vehicle, and expects to launch "at least 20" more by 2023.
- Significantly, GM believes that those new-tech businesses won't significantly disrupt its core profit driver (selling high-profit trucks and SUVs to Americans) for many years. It thus sees the potential profits from automated ride-hailing as additive to those from its current business.
- GM is also boosting its high-profit luxury offerings. It's expanding the presence of Cadillac in China, and developing several new models for the brand.
Toyota hasn't made a case like that. It's known to be working on self-driving technology, but if it has a plan for commercializing it (beyond offering it as an option on its regular passenger vehicles), it hasn't been disclosed.
As for electric vehicles, while Toyota is a global leader in gasoline-electric hybrids, it has been slow to embrace pure battery-electric drivetrains. Just this week, it announced that it plans to have "more than 10" electric vehicles on offer by the "early 2020s," and it's exploring a battery-making joint venture with Panasonic.
It's possible that Toyota appears to view its move into battery-electric vehicles as defensive, not as an opportunity to boost its bottom line. It's also possible that the company has an ace up its sleeve: It's believed to be close to commercializing "solid state" batteries, which can be recharged more quickly than current batteries, and may be cheaper to manufacture at scale.
General Motors estimates that it will be ready to mass-produce self-driving electric vehicles in 2019. Image source: General Motors.
The upshot: Is Toyota or GM the better buy?
GM seems like the better bet. Toyota is probably a safe investment (as stocks go, at least) that pays a solid dividend; investors could do a lot worse, and it may turn out to be a solid-state battery pioneer.
But at current prices, GM seems to have more upside: Barra and her team have outlined a clear profit-growth plan, and have already shown enough movement in the right direction to make the plan quite plausible.
GM's stock has had a good run over the last several months, rising about 20%. But given its current valuation, its emerging profit-growth story -- and that nice dividend -- I think there's plenty of profit potential left for a patient investor.
