Overview
In the past few years, the American car industry has experienced a tremendous revival from the depths of the 2008 Financial Crisis that damaged the industry. In conjunction with an overall American economic recovery, car sales in the United States have picked up substantially in the past few years. Many equities in the US car industry have performed exceptionally well, but as I will explain the shares of Ford Motor Company (F) and Volkswagen Group (OTC:OTCQX:VLKAY) remain undervalued on both an absolute and relative basis. These two companies have performed well in 2013 to date and going forward I believe that there is still large upside potential for these companies as a result of further earnings growth and multiple expansion. This is likely to be a continued trend as the global macroeconomic conditions improve, subsequently supporting increased automobile sales. Car sales are extremely sensitive to economic cycles, as they require high levels of consumer confidence in addition to credit availability.
Ford Motor Company
This behemoth of a company is often associated with its American heritage and its iconic truck brand. The company currently trades for just north of 10x 2013 earnings estimates and consensus analyst estimates call for over 9.5% EPS growth from this year to next. Ford currently holds just under 15% of the US auto market, according to the company. Ford also has significant sales outside of the US and has benefited somewhat from the relatively weaker US dollar in recent years. Obviously, the low rate environment in the US has supported vehicle financing and while rates will likely rise over the long term the Federal Reserve has indicated that it may be a few more years until interest rates begin to rise in conjunction with tightening monetary policy. Until then, Ford and the rest of the US auto manufacturers will benefit from the low rate of vehicle financing that consumers enjoy. Ford has net profit margins of around 3.5%, which is on the lower end of the scale of its peers, however this fluctuates over time and gives the company opportunity to improve its bottom line. The company also sports a dividend yield of around 2.3%. Ford is attractively valued relative to the market, its peers and its growth prospects.
Volkswagen Group
The Volkswagen Group based in Wolfsburg, Germany owns partial or full interests in a number of automotive corporations including Audi, Bentley Motors, Volkswagen and Škoda Auto, to name a few. The Volkswagen brand subsidiary is known for its affordable, efficient and compact vehicles that are popular in Europe. However, in recent months and years investors have not taken kindly towards shares in European companies and valuations are at a discount to other developed nations. This presents an opportunity for investors in Volkswagen since while the company is exposed to some extent to the financial woes of the European continent, the company does have a rather large amount of sales abroad. Volkswagen shares currently change hands for just under 8.5x 2014 earnings estimates, with consensus estimates predicting 15% EPS growth from this year to next. Volkswagen also yields around 1.3% based on the payment earlier this year. This seems an attractive entry point to take advantage of a successful company, which trades at a valuation discount to its peers and is set to benefit from a continuous global economic recovery.
Conclusion
The two companies mentioned in this article should have a successful 2014 due to expanding earnings and increased market valuation of the two firms. Additionally, they will benefit from the continued low interest rate environment in the US and Europe as well as continued global economic growth.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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