Like fine cars, there are some stocks that are worth their premium price tag. However, there are others that are just expensive and don't offer buyers any premium experience. We found three automotive stocks in that latter category, as they are just too pricey for potential future reward -- which is why we think investors should shy away from them.
The argument goes like this: Ferrari, which is about to be spun off, is likely to be valued around $9 billion; FCA's whole market cap right now is about $18.5 billion; and the parts of FCA that will be left without the spinoff add up to more than $9.5 billion of value.
It's possible that it will work out that way, and that shareholders will get a short-term boost. But from a longer-term investing perspective, there are two big problems. First, Ferrari is a powerhouse brand, but its growth prospects are extremely limited.
Second, FCA without Ferrari is a company with some very big problems:
- Huge debt payments will crush profits for years to come. FCA had almost $35 billion in debt as of the end of the second quarter. There's a plan to pay it off, but the payments (and the interest) will weigh on earnings into the next decade. €6.6 billion (about $7.4 billion) of that debt comes due in 2017 alone. That's enough to wipe out all or most of the company's likely pre-tax profit for the year unless it's restructured.
- Quality has been lacking. CEO Sergio Marchionne is counting on a slew of upcoming new products to drive growth and boost earnings. But current products rank at the bottom of most quality surveys, and investments that could improve those rankings are being postponed because of the huge product-development effort. If the new products are no better, sales may well disappoint.
- Where's the technology? Global rivals are aggressively developing electric cars, fuel cells, plug-in hybrids, and self-driving technology. Meanwhile, FCA's big technological coup of the last year was... a 707-horsepower Hemi V8. The auto industry is entering a period of massive technology-driven change -- but right now, FCA looks to be well behind.
Long story short: If you're looking for an automaker to buy and hold, I'd keep looking.
Rich Smith: At roughly half the P/E of Fiat Chrysler, General Motors (NYSE:GM) stock might not ordinarily be one you'd consider "overvalued." In fact, you might even be tempted to say that General Motors stock, with its low P/E ratio, generous 4.7% dividend yield, and strong projected growth rate (15.8% annualized over the next five years, according to analysts polled by S&P Capital IQ), is actually a bargain.
At just 11.4 times trailing earnings, General Motors stock looks to be the cheapest of the Detroit "Big Three." GM stock seems cheaper than Ford's 15.8 P/E and much cheaper than Fiat Chrysler's 20 P/E. What you may not realize, however, is that General Motors is the only one of these three companies that is currently burning cash even as it reports profits under generally accepted accounting principles.
Over the past 12 months, free cash flow at GM came in at negative $6.2 billion. That stands in stark contrast to its reported "profits" of $5.5 billion. And it's getting worse. For all of fiscal 2014, FCF was only negative $1.8 billion.
In contrast, Fiat Chrysler generated positive free cash flow of $1.7 billion (58% more than reported net income) over the past year, and Ford produced a veritable truckload of cash -- $7.6 billion in all, which was more than twice its GAAP net income.
Viewed in this light, General Motors stock isn't much of a bargain at all.
Matt DiLallo: Sure, Autoliv's (NYSE:ALV) stock is down more than 20% from its most recent high, but it's still pretty overvalued. Not only is its P/E ratio of 22 times at a slight premium to the market, but it's the highest of its peer group.
Furthermore, its EV/EBITDA ratio might be middle-of-the-road, but that doesn't make it a bargain.
This premium could be justified if Autoliv were growing really fast, but it's not. In fact, sales are actually expected to decline by 2% this year due to foreign currency headwinds. Even after adjusting for currency fluctuations, sales are only expected to grow by around 6% this year. That's assuming that China's economy doesn't crash, as no airbag will protect auto sales, and therefore auto safety equipment sales, if that happens.
There are simply better automotive stocks to buy these days than Autoliv. The risk/reward just isn't compelling for this cheap stock, and the upside looks limited.
John Rosevear owns shares of General Motors. Matt DiLallo and Rich Smith have no position in any stocks mentioned. The Motley Fool recommends Autoliv and 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.