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General Motors Company (GM), Ford Motor Company (F): Crowning the Most Undervalued Car Company

What about its Japanese counterparts?

Honda Motor Co Ltd (ADR) (NYSE:HMC) has the maximum exposure to North America among the major Japanese automakers. Ward’s Automotive Reports states that Honda’s U.S. market share rose from 9% to 9.9% in 2012. This is a positive for the company, but the real growth story lies in emerging markets, thanks to rising prosperity in these regions.

Recent performance has also been poor for Honda. December-end quarterly results showed that earnings came in at $0.53 per share, compared to $0.34 for the same quarter last year, but still well below consensus of $0.62. This makes it the fourth quarter in a row that the company has missed consensus EPS estimates by 15% or more.

Toyota Motor Corporation (ADR) (NYSE:TM) is still struggling from a slightly tarnished brand name. Toyota has been hit with a string of recalls that have impacted it performance of late, and could well be a drag on the company through the near future. Since late 2009, Toyota recalled over 15 million vehicles across a total of 20 recalls, which is greater than any other automaker.

The company was also fined $17.3 million in 2012 by the U.S. Transportation Department for late responses related to vehicle defects (read more about why GM and Ford beat out overseas competitors). The car company missed consensus December-end quarterly EPS by 35%, and has seen 2013 consensus earnings expectations lowered by 11% over the past three months.

Dividend & valuation

Although GM doesn’t pay a dividend, the company easily could. Ford pays out 28% of its earnings in the form of dividends, which is a 2.97% dividend yield. If GM were to pay a dividend with a similar payout as Ford, then its dividend yield would also be 2.9%.

On an EV/EBITDA multiple basis, GM trades at only 1.4 times, however, Ford is at 6.8 times. Applying a 6.8 times multiple to GM’s EBITDA, there could be upside of over 200% for General Motors Company (NYSE:GM). What’s more is that GM trades below Ford and other major car companies on a price to sales multiple basis:

Price to sales

GM 0.3 times

Ford 0.4 times

Honda 0.7 times

Toyota 0.7 times

Assuming that GM should trade more in line with its Japanese peers, at 0.7 times, the stock is undervalued by as much as 180% based on analysts’ 2013 sales estimates.

Don’t be fooled

After its bankruptcy, General Motors Company (NYSE:GM) has undergone notable restructuring, and now has a much healthier balance sheet and a plan for international expansion. The industry tailwinds are aligned to help propel all the major car companies, but I believe that GM has the best chance of seeing better than expected returns, given the fact that the company is undervalued. Another notable factor not baked into the stock is the potential for a dividend payout.

The article Crowning the Most Undervalued Car Company originally appeared on and is written by Marshall Hargrave.

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

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