Cyclical stocks can sometimes be tricky because they do well in a good economy and badly in a slow economy. It is why I have avoided the automotive industry over the last several years. But with the economy improving, the industry is picking back up.
Ford Motor Company (NYSE:F) has been on a roll this year, up almost 88% year to date. Can this continue? Does Ford Motor Company (NYSE:F) make a wise long term investment? Let’s look at some reasons why it could be.
source: Yahoo Finance
It is on sale
Ford Motor Company (NYSE:F) is currently trading at a P/E ratio of 11.21, and a PEG ratio of 0.8. Both of these values are below the sector averages of 12.3 and 2.3, respectively. The price to earnings growth is especially surprising. Ford Motor Company (NYSE:F) has beat earnings expectations the last 6 quarters running.
The makings of a growing dividend are present
Ford Motor Company (NYSE:F) is back on the path of dividend growth redemption. After financial troubles forced Ford Motor Company (NYSE:F) to cut the dividend in 2006, it wasn’t until January of last year before it returned. A little over a year later, and Ford Motor Company (NYSE:F) has already doubled this dividend. Better yet, the current dividend is only 16.6% of its cash flows. There is plenty of room for this dividend to move higher.
The outlook is strong
Ford recently posted very strong results, when it released its second quarter earnings. Ford beat consensus estimates $0.45 to $0.37. Not only that, Ford saw improvement in almost every financial category. Sales, revenue, net income, and even market share were ALL improved year on year. This resulted in management increasing earnings guidance for the rest of the year.
How does the competition stack up?
General Motors Company (NYSE:GM)
source: Yahoo Finance
General Motors Company (NYSE:GM) has been attempting to dig its way back since it received a “bail out” during the economic crisis. This has left somewhat of a “stigma” on General Motors over the past few years. Is it all bad news for GM?
GM trades at a P/E of 13.07, and PEG of 0.9. Both of these are comparable, but lower values than those of Ford. General Motors Company (NYSE:GM) has beaten earnings estimates for the last 2 quarters.
A big strike against General Motors Company (NYSE:GM) is the lack of a dividend. This forces one to rely on capital gains if they choose to invest in GM. The company has been operating smoothly, the last few quarters. The bailout created a pretty hazardous environment for any form of dividend. As General Motors Company (NYSE:GM) has basically fulfilled its obligations to repay the bailout – perhaps a dividend will appear in the future.
General Motors Company (NYSE:GM) reported similar growth patterns to Ford in its second quarter earnings call. Cash flow for GM has increased significantly. Its 2 strongest markets were North America, and Asia (as were Ford’s). Overall sales are higher for the year.
Toyota Motor Corporation (ADR) (NYSE:TM)
source: Yahoo Finance
Toyota Motor Corporation (ADR) (NYSE:TM) has been in better shape than Ford or GM the last few years (even with the recalls), mostly because it wasn’t hit directly by the turmoil of government bailouts or the US recession. It currently trades at a P/E of 19.7, which is above the industry average of 12.4. It is trading at a PEG of 0.7 that suggests, its growth is actually trading at an attractive value.
Toyota pays a dividend like Ford. It checks in with a yield of 1.63% on its current stock price, and consists of 30% of its cash payout. Its earnings have been mostly steady, as it has missed expectations only twice in the last 7 quarters.
Toyota’s earnings have seen some tailwinds, especially in the last quarter. With the yen weak, Toyota gets a boost from foreign profits. Overall, revenue increased almost 19% from the same quarter last year. With Toyota on a roll, it could be tough to keep the momentum going.
Domestic sales for Toyota are expected to decline, Toyota must try to grow further through North American sales as the US economy slowly builds steam. Toyota will continue to receive currency tailwinds, as the Yen remains weak.
The bottom line
All three companies have benefited from a recovering US economy, as the automotive industry has been on the rebound. It seems as though Ford is the best short to medium term buy of the three. It is growing at an impressive clip as management is hitting on all cylinders. With the highest dividend, a low payout ratio, and the best valuations to go along with rising sales – Ford has room to continue moving higher.
The article This Stock Is Speeding Ahead originally appeared on Fool.com and is written by Justin Pope.
Justin Pope has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Justin is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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