General Motors Company (GM), Caterpillar Inc. (CAT): The Car Giants Are Fully Valued, But Vehicle Values Exist

Many investors have been waiting for Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM) to “break out,” achieving at least a market-average PE. That ratio is currently over 18 for the S&P 500, well above long-term averages but well within those achieved by recoveries since 1990.

Compared with that, both large car companies look dirt-cheap. Ford Motor Company (NYSE:F) is trading at a multiple of 9, General Motors Company (NYSE:GM) at 10.

But don’t be fooled.

The Case For Cars

The case for both companies looks strong on paper.

Input costs, especially for energy, are at historic lows compared with the competition. Labor costs are under control, and market shares are rising.

The most recent report for March shows General Motors Company (NYSE:GM) with about 16.9% of the U.S. market, and Ford with 16.2%. GM is doing a little better in cars, Ford a little better in trucks.

Exports are also strong. Ford Motor Company (NYSE:F) thinks it can double its share of the Chinese market to 6% in the next two years, and is building factories in China aimed at doing just that. Ford has returned to giving dividends, and at its present price provides a yield of over 3%.

There are bulls who feel even more strongly about General Motors Company (NYSE:GM). The company paid back its government loans late last year, taking a $14 billion loss for the December quarter in order to get out from under government control.

GM is now upgrading its light truck line and has passed Volkswagen in global sales, becoming the second largest car company in the world after Toyota. It has profits and limited debt, and while it’s unlikely to resume paying a dividend soon it has warrants that look very attractive. If you like GM’s prospects, that’s the way to play.

But I’m going to tell you now that you should stay away from these stocks, that there are better buys out there, even in the U.S. vehicle market. Ford and General Motors Company (NYSE:GM) are highly unlikely to gain expanded multiples on their earnings, and neither stock has moved much in the last year.

You’re much better off looking for bargains.

CAT: The Case For Industrial Vehicles

Caterpillar Inc. (NYSE:CAT) never took government money, and never fell the way the carmakers did. But backhoes and other industrial vehicles are still vehicles, Caterpillar is a maker of vehicles, and the economics of production are quite similar.

While Caterpillar is a steady dividend payer, its yield at this point is just 2.17%, much lower than that of Ford. And it is selling for nearly one-third less than its peak price, achieved last year, of $116.