Which Automotive Stock Will Shift into a Higher Gear in 2014?

One automaker looks poised for growth, but investors shouldn’t count out its competitors.

Automotive stocks rose for the most part this year, but some may be better poised than others to hit the ground running in 2014.

Ford (F) for one, still looks attractive, despite falling sharply after providing a weak 2014 outlook in December 2013. Higher warranty expenses, a large recall, and headwinds in emerging markets spooked investors, but this also might create an entry point for those who missed the last run-up.

2013 hard to match

The last year was a strong one for automakers like Toyota (TM), General Motors (GM) and Ford, and will be difficult for any company to match in 2014.

Click on the interactive chart to see returns over time. Sourced from Zacks Investment Research.

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Ford saw a multi-year turnaround bear full fruit last year. By streamlining and simplifying production costs, Ford managed to generate nearly $8.5 billion in pre-tax profits. A less robust 2014 does not necessarily justify a lower forward price to earnings multiple for Ford.

Ford is valued at just 10.92 times forward earnings, while Toyota has a forward p/e of 14.16 and GM is valued at 16.84 forward p/e. Ford shares lagged competitors in the last three months, but the under-performance is even more apparent over a three year period:

Click on the interactive chart to see stock price data over time. Sourced from Zacks Investment Research.​

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Ford is a much smaller company compared to Toyota, whose market share is $190.94 billion, compared to Ford’s $61.14 billion. But Ford leads Toyota in North America, and could widen that gap this year. General Motors trails Ford slightly in market capitalization at $54.84 billion

Transformation in 2014

Following a 9.5% operating margin expectation for 2013, Ford expects to improve its balance sheet in 2014. Investors could look at Ford as a company that is wrapping up its turnaround, and may be positioned for growth.

Helped by improving global demand for automobiles, Ford, Toyota and GM may benefit as they release new or refreshed models. But launching new products does not come without risks, and some automakers may be conservative with growth plans.

Is Ford the long-term play?

Ford might manage $7 billion - $8 billion in pre-tax profits in 2014, with higher profits possible by 2015. Its recent dip created an entry point for investors looking for a position in among automotive stocks. Shares offer a dividend yielding 2.58%, compared to 2.1% from Toyota and none from GM.

 

Written by Chris Lau.  Disclosure: Author is long F

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