Tuesday, November 28, 2006

Automotive Wars

The airlines are famous as shareholder value destroyers. But the automotive industry must rank not far behind. With Toyota generating buzz recently as it anticipates becoming the largest car producer in the world we thought we'd take a look at the top three players - General Motors (GM), Toyota (TM) and Ford (F) . Here's a useful table:

........Production..Revenue..Operating...Assets/Equity..Stock price
........millions.......$billions....margin %...............................Rise % p.a.
GM..9................193..............0......................31.7..................4.3
TM..7.1.............181..............9.......................2.7...................11.4
F......6.4.............177..............4......................20.7..................2.9

Note: Stock price appreciation April 1993 (date of TM's New York listing) to present adjusted for dividends and splits but not spin offs.

Toyota is the low cost producer. Although Ford's operating margin looks half way decent, bear in mind that this excludes interest expense which is very high for Ford. The assets/equity ratio is key here. The American producers are struggling under a triple liability burden. The pension and healthcare benefits explosion has been much written about, but far worse is the effect of their financial indebtedness.

Toyota's overall leverage is about ten times less than its rivals'. GM and Ford have effectively been subsidising their customers with cheap credit and this has further worsened their inferior competitive position in that it overstates their already low operating margins.

Toyota vs GM or Ford would make a classic hedged pair trade. Toyota on its own does not look that cheap or expensive at around 16 times their own forecast for this year's earnings.

Disclaimer: We do not hold any positions in stocks named.

Stocks mentioned: GM, TM, F

2 comments:

Jason said...

I think one thing that has to be taken into account is the how the OEMs are selling cars. The domestic producers have taken a lot off flack for the deep discounting in order to move units. However, Toyota has also been doing this as of recent, offering huge rebates and cash back, "temporarily" inflating short term sales. Coupled with the fact that Toyota has experienced a rash of recalls recently, it should be interesting to see if they can keep up their images of quality & costs.

While I am certainly not placing any bets on GM, Ford or DCX...of the three, I think GM certainly has the best chance for long term success.

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