Since Memorial Day weekend is the unofficial start of summer, millions of Americans are hopping into their vehicles for the first of many fun road trips.
Drivers who are hesitant to take to the highways in an old family jalopy that’s seen better days will be bombarded with holiday sales and limited-time offers on a new vehicle.
Likewise, investors looking to cash in on the trend of stronger auto sales are looking to this sector for solid returns — and in some cases, income. But just as car buyers who shop around and compare features and prices often get better deals on the vehicle of their dreams, the same is true for investors in auto stocks.
Despite a sluggish start to the year due to the long, tough winter, Edmunds.com forecasts 16.2 million new vehicles will be sold in the U.S. in 2014. And that’s good news for automakers and their investors.
But in a market where pent-up vehicle demand is making the sector’s performance look shiny, not all auto stocks make the grade. Here we offer report cards for five auto stocks, breaking down which ones make the grade — and which ones that might need summer school.
Report Cards for Automakers – Ford (F)
Current Dividend Yield: 3.1%
YTD Performance: +4%
Despite reporting a first-quarter earnings miss last month, there are several things to like about Ford stock.
Ford still is on track to deliver pre-tax earnings of between $7 billion and $8 billion for the full year. Ford’s Europe operations, which have been a quagmire for the automaker for the past several quarters, are beginning to cut losses and position it for sales growth. The automaker turned a loss in the Asia-Pacific region into a $291 million profit — China operations were particularly strong.
Meanwhile, Ford stock sports a price/earnings-to-growth ratio of less than 1 (indicating it’s undervalued), and its forward P/E of 8.4 is also attractive. It’s also hard not to like Ford’s 3.7% current dividend yield, and plans to buy back $1.8 billion in stock underscore the company’s commitment to shareholder value.
One potential headwind: On July 1, turnaround architect Alan Mulally will hand off the top job to his handpicked successor, Mark Fields. Fields will provide continuity of leadership, but expect Ford stock to lose some lift this summer due to the transition.
Report Cards for Automakers – Toyota (TM)
Current Dividend Yield: 2.1%
YTD Performance: -10%
Toyota, which produces most of its vehicles in Japan, got a huge boost from a weak yen. However, Toyota has had to contend with recall challenges recently — TM announced on Thursday that it is recalling more than 500,000 vehicles worldwide for three separate problems. That follows a recall of some 6.4 million vehicles in April.
Toyota, which still holds the crown as the world’s largest auto manufacturer, is staking a claim on green energy — and taking aim at Tesla’s (TSLA) Elon Musk in the process. At Fortune’s Brainstorm Green conference this week, Toyota North America CEO Jim Lentz was bullish on growth of electric vehicle sales.
TM stock has been roughed up a little bit this year, and presents investors with the opportunity to buy on the dip. Toyota’s fundamentals are strong and include cash flow of nearly $36 billion. Meanwhile, TM sports a P/E of 8.8 and a low, low PEG ratio of 0.27.
Report Cards for Automakers – Chrysler/Fiat (FIATY)
Current Dividend Yield: N/A
YTD Performance: +22%
Fiat (FIATY) kicked off 2014 by paying nearly $3.7 billion for the United Auto Workers’ 41.5% share of Chrysler. FIATY now owns all of Chrysler, and could spin off the iconic Detroit automaker in an IPO by October. The company is bullish on growth: It hopes to sell 3.1 vehicles in the U.S. this year — that’s 1 million more than it sold in 2013.
At a recent briefing, CEO Sergio Marchionne shared plans to grow his company’s North American sales by 48% over the next five years. Fiat CEO Richard Palmer recently said its focus is using cash for research and development rather than paying dividends or creating a finance unit. That focus further highlights FIATY as a growth buy.
Report Cards for Automakers – Tesla Motors (TSLA)
Current Dividend Yield: N/A
YTD Performance: +37%
Elon Musk’s Tesla Motors (TSLA) has turned the automotive industry on its ear, and accolades (including honors from Motor Trend and Consumer Reports) and have been plentiful. TSLA has convinced the auto industry that green can be beautiful, as the $69,000 model S electric roadster makes clear.
The larger question is, can TSLA make a beautiful, all-electric vehicle that captures auto-buyers’ fancy for $35,000?
TSLA is growing its market in Europe, making a commitment to expand its so-called Supercharger network. Musk’s plan to build a “gigafactory” to lower battery costs and boost power also is dazzling the popular press.
The buzz about TSLA is great, but the hefty valuation is too rich for my blood. TSLA has a PEG ratio of nearly 4 and a forward P/E of 64.7 places the stock solidly into overbought territory. You have to pay for growth, I know, — this is just a traditional value-lover talking. Obviously the growth potential is huge, so if you’re comfortable with overpaying, you’re at least getting into something worth buying.
Report Cards for Automakers – General Motors (GM)
YTD Performance: -18%
First the good news: General Motors (GM) stock is very cheap right now: Its PEG ratio of 0.5 and the forward P/E of only 7 are the lowest in the sector. Add to that the second-highest dividend yield among automaker stocks – 3.6% — and GM stock is quick to grab your attention.
Now for the bad news: GM has issued recalls for nearly 14 million vehicles so far this year — and the recall parade is far from over. Federal regulators last week fined GM $35 million for delaying recalls of faulty ignition switches tied to at least 13 deaths. The company faces multiple federal investigations into the recall crisis and GM could still be on the hook for millions of dollars in civil penalties.
The greater risk to GM stock is whether the company is found to have known about the fatal ignition defects and failed to disclose them during the old GM’s bailout and bankruptcy. General Motors’ story will continue to evolve over the summer — and summer investigations in Washington tend to take on a life of their own.
In short, we don’t know what we don’t know about GM’s liability, making it a good idea to sit on the bench on the stock until we see a clearer bottom.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned stocks.