A Look at Two Industry Giants (& their Lack of Performance)
Since July 15, 2011, which was just before the S&P downgraded U.S. debt and also during the period of debt negotiations, General Motors Company (NYSE:GM) has traded with a loss of 2.0% while the S&P 500 has gained 18.5%. During the same period, General Motors Company (NYSE:GM)’ competitor Ford Motor Company (NYSE:F) has traded with a similar 1% loss.
The question is if auto is the strength of the U.S. economy, creating thousands of jobs, why are these stocks trading lower? It doesn’t make sense, and there is no logical explanation. General Motors Company (NYSE:GM) still has the attachment to government from its recession bailout, but Ford is independent with a dividend yield of 3%. Yet both companies trade with single-digit P/E ratios and price/sales ratios near 0.35, despite strong revenue growth.
Some bears may suggest that Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM)’ weakness is due to Europe and unpredictable costs. While these suggestions may be true, it doesn’t explain the degree of weak performance relative to the strength of the overall industry.
Thus conventional wisdom suggests that in time both stocks will appreciate to reflect fundamental and macro gains, and at this very moment, losses are more technical and are making both stocks more attractive to long-term value investors. While this is most likely true, investors should take notice of another auto-related company, one that has performed with perfection since the recession, and that is Sirius XM Radio Inc (NASDAQ:SIRI).
Sirius XM: The Best Auto Play for Gains Now
Since July 15, 2011, Sirius XM Radio Inc (NASDAQ:SIRI) has increased in value by 45% and since January 2009 the stock is higher by more than 2,000%. In many ways, Sirius XM Radio Inc (NASDAQ:SIRI) has become the quintessential automotive play because it directly benefits from the sales of new automotives. It offers a service (Sirius XM Radio Inc (NASDAQ:SIRI)) in most new cars that is free for a period of three or six months (even a year in some), and then once the trial is up the company benefits from those who subscribe. Hence the company benefits from a large number of vehicles being sold, and this has rung true for all of the last three years.
Currently, Sirius XM Radio Inc (NASDAQ:SIRI) is trading higher by 4% after announcing earnings. In the quarter, Sirius added 452,890 subscribers, posted record revenue of $897 million, and increased its free cash-flow guidance for 2013 to almost $1 billion. The reason for this strength is due to the fact that auto sales are growing rapidly. Therefore, with Sirius seeing such strong fundamental performance with auto sales, and with auto sales expected to continue to grow fast over the next two years, I say “buy” Sirius!
Conclusion (Investment Outlook)
When you look at Sirius XM Radio Inc (NASDAQ:SIRI) from a valuation point-of-view, you realize that both General Motors Company (NYSE:GM) and Ford Motor Company (NYSE:F) are clearly cheaper. Therefore, it makes sense to invest in Ford Motor Company (NYSE:F) or General Motors Company (NYSE:GM), because after all these are the two companies responsible for the growth, right?
In my book, Taking Charge With Value Investing (McGraw-Hill, 2013), I discuss in detail when a stock is clearly hated by the market but is obviously the better value. My suggestion, and what has worked for me, is to capitalize on both in the growing space. In other words, why put all your eggs in one basket?
You already know that Sirius trades with a price/sales near 6.0 and a forward P/E ratio of 25.0, making it clearly more expensive. Yet it performs with the growth of auto sales, and with auto sales expected to rise, it makes no sense not to buy a stock that has performed so well with growth. Therefore, a small position in both Sirius and either General Motors Company (NYSE:GM) or Ford Motor Company (NYSE:F) might prove wise, as you take advantage of Sirius’ consistent return and anticipate that sooner or later Ford and GM will reflect fundamental performance in stock valuation.
The article Earning Maximum Gains in the Auto Industry originally appeared on Fool.com and is written by Brian Nichols.
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