(John Dorfman, chairman of Thunderstorm Capital in Boston, is a columnist for Bloomberg News. The opinions expressed are his own. His firm or clients may own or trade securities discussed in this column.)
Ford Motor Co. has risen 68 percent this year, more than any stock in the Dow Jones Industrial Average, which hasn’t had an automaker in it since General Motors Corp. was kicked out in 2009.
If you think auto companies are has-beens, it’s time to reconsider. Vehicle sales in the U.S. are climbing fast, albeit from a low base. The despairing refrain that consumers won’t buy cars without a tax incentive like the cash-for-clunkers program has proven to be unfounded.
In October and November, sales of cars and light trucks reached a seasonally adjusted annual rate of more than 12 million units, the best showing in more than two years.
A pace of 14 million — 1 million vehicles below the 20-year average — would be enough to propel car manufacturers and auto-parts makers to large profits because they have cut their costs. The industry has shed less-profitable divisions, brands and models, reduced the number of dealerships and negotiated more modest wage-and-benefit packages.
If this industry is making a comeback, is Ford the best stock to buy? I like Ford but prefer General Motors Co., which re-emerged as a public company last month. And I like Kia Motors Corp. more than either of those U.S. stalwarts.
Ford has several virtues. The company has been gaining market share from GM for years. It has posted six quarterly profits in a row. Alone among U.S. automakers, it disdained federal aid during the recession. Its November sales increased 24 percent year-over-year. And its stock sells for eight times earnings, an attractive multiple.
Negative Net Worth
The main thing that troubles me about Ford is that the company’s net worth is still negative, a vestige of the recession. As of Sept. 30 its liabilities exceeded its assets by $1.7 billion.
Granted, that situation is improving rapidly. Ford’s liabilities exceeded assets by $16 billion in March 2009. In a quarter or two, the company’s net worth could be positive again. Yet it makes me extremely uneasy to buy a stock whose equity figure is written in red.
GM has a better balance sheet, burnished by its passage through bankruptcy. In March 2009, one quarter before it declared bankruptcy, GM reported $173 billion in total liabilities against $82 billion in assets.
Today, GM has debt equal to less than 38 percent of stockholders’ equity, putting it in the balance-sheet zone I like best (debt less than 50 percent of equity). It has reported three straight quarterly profits.
GM also has weaknesses. The company has been losing market share to Honda, Toyota and Ford for more than a decade. Its November sales gain failed to match its rivals. GM’s management is relatively untested, and the U.S. government — potentially an awkward partner — still owns about one third of the company.
A better option may be Kia, the South Korean upstart. Kia has been following the playbook used years ago by Honda Motor Co. and Toyota Motor Corp.: Start in the U.S. with small, economical models, then slowly move up.
North America is Kia’s second-biggest market, after South Korea. I wouldn’t be surprised if Kia gets more sales in the U.S. than in its home market by 2015. Analysts estimate earnings will more than double this year on a consolidated basis.
U.S. consumers have pent-up demand for cars, but their budgets are still tight. Accordingly they may go for Kia’s relatively economical models.
Kia sells for less than nine times estimated earnings for calendar year 2010 and about eight times earnings expected for calendar 2011.
Investors who are fond of strong balance sheets, as I am, may want to take a look at parts manufacturers rather than the automakers. In the U.S. and Canada, there are 20 parts suppliers with a market value of $100 million or more that have debt less than 50 percent of equity.
Magna International Inc., based in Aurora, Ontario, makes a wide variety of components, has been profitable in 18 of the past 20 years, and has debt less than 2 percent of equity. I think it is a good buy at about 16 times earnings.
Disclosure note: I own shares of Dorman Products Inc., an auto-parts maker, for clients and personally. However, I would not recommend putting new money into it, partly because it has more than doubled this year. I currently have no long or short positions in the other stocks discussed in this column.
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