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Ford Motor Company (F), Toyota Motor Corporation (ADR) (TM): American Muscle vs. Japanese Imports

The automotive industry has been improving lately due to increasing auto sales. Ford Motor Company (NYSE:F). and General Motors Company (NYSE:GM) were both profitable in the first quarter of 2013, and consequently they have rallied to new 52-week high levels. Japanese giant automakers Honda Motor Co Ltd (ADR) (NYSE:HMC) and Toyota Motor Corporation (ADR) (NYSE:TM) have also seen appreciation in their stock price. While I have no doubt that all four stocks will perform well in the near future, I like to invest in only the best.

American muscle!

Ford ToyotaOn valuation, Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM) would seem evenly matched. Their price/earnings ratios are low compared to the automotive industry. Ford trades with a P/E of 10.19 and a forward P/E of 9.08, while General Motors trades with a P/E of 11.52 and a forward P/E of 7.68. The price/earnings-to-growth ratios for the companies are comparable as well, with Ford Motor Company (NYSE:F)’s PEG at 0.97 and General Motors’ PEG at 0.82.

Ford Motor Company (NYSE:F) had an outstanding earnings report for the first quarter of 2013. The Mustang sportscar developer increased its net income to $1.6 billion, or $0.40 per share, which is an increase of $215 million over a year ago. A steep increase in units sold in North America pushed its overall revenues higher as well. However, the total units sold in Europe declined from 372,000 in the first quarter of 2012 to 341,000 in the first quarter 2013. In the end, the company’s guidance remained unchanged for the rest of the year. As Professor Sheldon Cooper would say… Bazinga!!!

General Motors had a modest first quarter in 2013. Its revenue was $36.9 billion, compared to $37.8 billion in the first quarter of 2012. Its net income declined to $0.9 billion, or $0.58 per share, from $1 billion, or $0.60 per share. Even with the strong demand for automobiles, General Motors was not able to take advantage of the situation and the company’s net income shrunk.

Ok, so far we have seen their past performance. But what about the future?

As Dr. Cooper would say… “I am so glad you asked.” The market outlook seems shiny. The domestic market remains strong, and the Asian market is improving as well despite the presence of competing Asian automakers such as Toyota Motor Corporation (ADR) (NYSE:TM), Honda Motor Co Ltd (ADR) (NYSE:HMC), and even Tata Motors Limited (ADR) (NYSE:TTM). It is the European market that may be worrisome, or I should say was worrisome. A report released last Friday on European automotive marketing states that car sales have increased for the first time since 2011 on a monthly basis. This should boost Ford Motor Company (NYSE:F)’s European car sales, and as a result its net revenue should increase. Hence, I sanction that Ford will outperform General Motors.

Japanese car performance

The ballgame is totally different here. Though it seems that Honda and Toyota Motor Corporation (ADR) (NYSE:TM) are doing fine and dandy while bringing capital appreciation to their investors, I believe their outlook may be troublesome.

Honda is trading with a P/E of 20.6 and a forward P/E of 13.32. Toyota Motor Corporation (ADR) (NYSE:TM) is slightly overvalued compared to Honda, as it is trading with a P/E of 26.64 and a forward P/E of 14.15. Its PEG ratio is 0.59, however, compared to Honda’s PEG of 0.77.

Toyota Motor Corporation (ADR) (NYSE:TM)’s net revenues increased by 18.7%, totaling 22.0 trillion yen for the 2013 fiscal year. Its net income increased to 962 billion yen for the fiscal year, up from 283.5 billion yen for fiscal year 2012. Overall, the company saw increasing automotive sales to 8.87 million units, an increase of 1.51 million from a year ago.

Honda’s net revenues increased to 2.74 trillion yen for the fourth quarter of 2013, up from 2.40 trillion yen for the fourth quarter of 2012. Its net income increased to 75 billion yen from 71 billion yen over the same period. The company’s solid balance sheet allowed for its dividend offer to be hiked from 60 yen in fiscal year 2012 to 76 yen in fiscal year 2013.

The net income increase was mainly due to a rise in the number of units sold in Asia to 280,000 for the fourth quarter of 2013, compared to 236,000 for the fourth quarter of 2012. Units sales declined in Japan and North America by 12% and 9% respectively, however.

In brief, Toyota Motors has had stronger sales recently. Honda, on the other hand, is losing its market share and has no future catalyst to help it increase its sales. Although I love Honda cars and actually own one, I believe that investing in the company is not wise at the moment. Investors should delve into the company’s next earnings report to see if the number of units sold increases. The automobile market is strong, and if Honda can’t increase its sales now then it never will.

It’s also worth noting that these Japanese stocks have rallied recently due to monetary policies from the Bank of Japan. Other countries are politely asking the bank to hold its horses, however, in hopes of preventing the bank from triggering a currency devaluation battle. When, not if, the Bank of Japan reduces its quantitative easiness policies, the yen will gain strength and Japanese exporters such as Honda and Toyota will be punished.

I want to invest in the automobile industry. Which one do I pick?

The automotive market outlook looks strong, and Ford has the best business model. Its units sold increased in North America, Asia and Japan, though they did decline in Europe. Recent reports suggest that the auto market in Europe is picking up, however, and this was the last component Ford needed to begin a steep ascend. Although Toyota also looks strong, the yen fluctuations due to monetary policies from the Bank of Japan might damper its net income in the future.

The article American Muscle vs. Japanese Imports originally appeared on Fool.com and is written by Robinson Roacho.

Robinson is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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