It's hard to argue with success, and Ford
- Four consecutive profitable quarters since the automotive Armageddon of early 2009.
- Strong growth in critical overseas markets like India and China.
- Continuing, strong gains in market share around the world.
- Success in paying down its debt and improving its credit rating.
Great stuff, all of it. CEO Alan Mulally's daring turnaround of the Dearborn-based giant will be the subject of business-school case studies for decades. And the company's stock price has shown its approval, increasing sevenfold since being left for dead in early 2009.
Ford's fans and shareholders clearly have had a lot to be happy about in the last year. And notwithstanding that 650% run, I think Ford is still an intriguing buy at current levels. After all, its turnaround -- like the economy's recovery -- still has considerable room to run, and its stock should continue to reward patient investors.
But is it the best automotive buy right now? Might there be another global giant still in the early stages of its own turnaround, one that might yield even greater rewards over the next few years?
Nope, I'm not talking about General Motors' upcoming IPO. I'm talking about Toyota
Buy Toyota now? Are you serious?
Toyota was a growth juggernaut (at least by auto company standards) for years, but its well-publicized troubles of the last year have put a significant dent in its armor, taking its stock price from $90ish to its current levels around $70. A big incentives push helped U.S. sales earlier this year, but recent results show them in third place in this market, well behind General Motors and Ford.
Further evidence that the Toyota brand has been damaged came last week, when the most recent J.D. Power Initial Quality Study showed Toyota in 21st place, a shocking drop attributed in part to perceptions emanating from the recalls earlier this year. That's a problem: Toyota's products have a reputation for being boring but reliable, and that reliability has been a key -- maybe the key -- selling point. Having (for the moment, anyway) ceded the quality crown to rivals like Ford and Honda
So their stock price has fallen due to problems, but management seems to be taking steps to address those problems. Does that add up to an opportunity?
Toyota as an investment
Auto stocks, of course, are cyclical stocks -- they tend to move through boom-and-bust cycles. One indicator that experienced cyclical-stock investors tend to look for is a high price-to-earnings ratio. That may be counterintuitive for those coming from a value-investing standpoint, but here's the reasoning: Earnings on cyclical stocks tend to make more extreme swings than their stock prices do. A good company with a crazy-high P/E ratio might be near a cyclical low -- warranting further attention.
By that measure, Toyota's a great candidate, with a P/E around 50 at the moment (Ford's, by comparison, is around 7). Unlike a lot of automakers, Toyota has a long track record of profits -- the company's 2009 fiscal year, which ended March 31, 2009, was their only unprofitable year in the last 72 years -- and the company made a strong recovery in 2010. Likewise, Toyota's debt load is reasonable, and their Standard & Poor's credit rating is an exceptionally solid (by industry standards) AA.
What's more, Toyota's management is taking steps to learn and move on from the hard lessons of the last couple of years. Global efforts to improve quality, manage growth more effectively, and make their products more exciting and desirable may incur costs in the short run, but should pay off over time.
So what's the upshot?
Toyota, despite its recent woes, is kind of the beige Camry of stocks: While it'll follow cyclical cycles, it isn't likely to let you down -- but it isn't likely to rock your socks, either. Assuming that the company will improve its position in key markets like the U.S. and China as the recall scandals disappear in the rearview mirror, the stock seems likely to appreciate slowly over time as the global economy continues to recover. I don't think we're looking at a dramatic turnaround-driven bounce anytime soon.
That slow-but-steady appreciation, coupled with a modest dividend, might make it appealing to some -- if you've ever wanted to own Toyota, now seems like a great time to buy -- but if that's the kind of stock you want, I'd argue that you'd be better off skipping the cyclicals and going with a solid big-name blue-chip instead. Johnson & Johnson
Meanwhile, what of Ford? I'm a fan of the company (and a shareholder), but there's an argument to be made that it's somewhat overpriced at the moment -- for a new investor, in other words, the ship might have already sailed. I'm not sure I agree with that: Ford's turnaround (and its stock's performance) has been exceptionally impressive, but there's still a long way to go before we can pronounce this company fully recovered.
Assuming that Ford continues to pay down its mortgaged-to-the-hilt debt load, and its domestic sales success and overseas growth continues, Ford's stock should continue to deliver solid results for a while yet. Put another way, Ford's probably a riskier buy than Toyota, at least on paper -- but chances seem good that patient investors will be well-rewarded for that risk in coming years.
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