The auto industry is a worldwide business, but where a company has its headquarters is less important than where it has production facilities serving key markets. Both Toyota Motor (NYSE:TM) and Fiat Chrysler Automobiles (NYSE:FCAU) have extensive operations both in the U.S. and around the globe, and they've worked as hard as they can to overcome the threat of tariffs and other trade-related pressures while still making smart corporate decisions that maximize their worldwide sales and profits.
Given how cheap auto stocks have been lately, it's easy to look at the entire sector as a value opportunity. But it's also important to incorporate growth projections into an assessment of a stock's prospects. Here, we'll take a closer look at both of these car companies to see which one comes up as the better buy.
Valuation and stock performance
Both Toyota and Fiat Chrysler have seen their shares under pressure lately. Toyota stock is down 10% over the past year, while Fiat Chrysler has seen an even more dramatic drop of 32% since February 2018.
Both stocks also look ridiculously cheap on an earnings basis. When you look at recent past results, Fiat Chrysler comes out looking just a bit more attractive, with a trailing earnings multiple of 6.5 compared to around 7.5 for Toyota. But the disparity gets even bigger when you incorporate near-term future earnings expectations into the mix, as Fiat Chrysler's forward multiple falls to between 4 and 5 while Toyota stays closer to 8. From a valuation standpoint, Fiat Chrysler's share price declines have made it look better than Toyota.
If you want a dividend, then you have only one choice to make. Fiat Chrysler doesn't pay a dividend. Meanwhile, Toyota has consistently made dividend payouts and currently yields just over 3%.
The reason is pretty simple. Fiat Chrysler has a lot of debt on its balance sheet, and the company has set getting that debt paid down to more manageable levels as a top priority. That's especially important if concerns about future growth turn out to be warranted, because now's a good time for Fiat to divert cash flow toward getting debt levels lower so that financing costs won't rise in the face of higher interest rates.
Meanwhile, Toyota has done a good job of consistently paying about 30% of its earnings to shareholders as dividends. Although the payout has risen steadily over the years in Japanese yen terms, the dollar equivalent has been more volatile, reflecting the ups and downs of the foreign exchange markets. Nevertheless, with a healthy and growing dividend, Toyota definitely has more appeal than Fiat Chrysler to income-minded investors.
Growth and potential risk
Challenges in the auto industry have forced both Toyota and Fiat Chrysler to take steps to sustain their growth. For Toyota, rising costs have been a major problem, and in its most recent quarterly report, the company reported modest revenue increases on a slight downtick in unit sales volume of vehicles. A big extraordinary adjustment sent net income down more than 80% from year-ago levels, but more importantly, weakness in North America, Asia outside of Japan, and most emerging markets offset Toyota's strength in Japan and Europe. Looking ahead, Toyota predicted weaker full-year net income for fiscal 2019 than previously anticipated, but the automaker is still optimistic that it will be able to meet its previous sales forecasts and keep operating results steadily growing.
Fiat Chrysler showed very different trends in its most recent results, but it also sees potential troubles ahead. The company said that revenue rose 6% in the fourth quarter of 2018 compared to the year-earlier period, with profit soaring by more than 60% over the same period. Large gains in the Americas helped to offset losses in the Asia-Pacific region, but weakness across Europe also hurt the company's overall performance. In particular, poor results in the luxury Maserati business weighed on sentiment, and Fiat Chrysler gave downbeat guidance for 2019. Until the company can manage to do more to take advantage of growth prospects in China and Europe, it'll be hard for Fiat Chrysler to realize its full potential.
Staying ahead of the game
With a higher dividend and more solid growth prospects, Toyota looks like the better buy between these two stocks. Fiat Chrysler has plenty of potential to turn itself around, but the process could take longer than investors are willing to wait. Until there are more signs of success at Fiat Chrysler, Toyota offers a better risk-reward proposition.