Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Is Ford a Good Stock to Buy?

Consumers supposedly have a better impression of Ford Motor Company (NYSE:F) than of rival General Motors Company (NYSE:GM), but that relative advantage isn’t translating into much help for Ford’s business. In the second quarter of 2012, revenue was down 7% from the same period in 2011. With operating costs not declining at the same rate, and a few non-operating factors such as a higher effective tax rate, Ford ended up with less than half the earnings it had made in the second quarter of last year. Earnings per share for the first half of the year were 61 cents, down from $1.20 a year earlier. Looking at more recent data, sales for the month of September- a good month for the auto industry as a whole- were flat though small car sales were quite good. Ford rallied in the first quarter of this year, but has since dropped to 8% below its price from the beginning of 2012 and down 26% from its price two years ago.

We’ve noted the 61 cents per share in earnings in the first half of the year; annualizing that yields a P/E multiple of 8. Wall Street analyst consensus for 2013 is that earnings will be slightly better, and so the forward P/E based on their expectations is 7. With the continued growth that analysts expect, the five-year PEG ratio is 0.8. Ford’s low stock price also makes its fairly low dividend a modest 2.0% yield.

David Tepper

Some value investors have come to see auto companies as good investments, and Ford’s low multiples make it no exception. Billionaire David Tepper’s Appaloosa Management increased its stake in Ford by 17% during the second quarter and owned a total of 7.7 million shares at the end of June (see more stock picks from billionaire David Tepper). Legg Mason Capital Management, a value-oriented mutual fund managed by Bill Miller, also increased the size of its position; it reported 11.8 million shares of Ford in its 13F portfolio (find more stocks owned by Legg Mason Capital Management).

GM’s performance has also disappointed investors, as its stock is down 28% since its IPO in November 2010, but at least one big name still thinks it’s a buy. David Einhorn of Greenlight Capital, who has lost a lot of money in GM, named it as one of his two long picks at the Value Investing Congress in early October. Read our article about Einhorn staying in GM. GM trades at 6 times forward earnings estimates, and its second quarter was a hair better than Ford’s as its revenues were down 5% and its earnings were down 38% from a year earlier. It also posts an attractive five-year PEG ratio, with analysts’ earnings trajectory implying a value of 0.7. We’d say that any difference between the two companies is marginal compared to their valuation relative to the market.

Other auto companies include Toyota Motor Corporation (NYSE:TM) and Honda Motor Co Ltd (NYSE:HMC), with The Goodyear Tire & Rubber Company (NYSE:GT) representing another way to invest in a cheap company tied to autos. Goodyear’s forward P/E is 5, and while the company carries a good deal of debt and risks related to its pension program it also has some attractive characteristics. Its earnings came in nearly twice as high in its most recent quarter as in the same period a year ago, and it is not as dependent specifically on new car sales as the auto manufacturers. The other manufacturers have been seeing large increases in revenue and earnings, with the caveat that their figures were artificially low a year ago as they recovered from the effect of the Fukushima disaster on their business. Toyota and Honda trade at 11 and 7 times estimates of their forward earnings, respectively. Honda also has an attractive dividend yield of 3.2% and strong growth expectations from the Street (five-year PEG ratio of 0.3), and it seems to be a better buy than Toyota and quite possibly better than the other companies we’ve covered here as well.

Ford and GM seem fairly valued relative to each other, and while they have been struggling recently their valuation deserves attention from investors. There are a number of other apparent values in the global auto theme, and in particular we’d single out Honda as an only slightly more expensive and better-performing company.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.