Finding Value in 2014: Automakers

In continuing my series on how investors can still find quality stocks at a good value, I have identified the automotive industry as one still generally trading at reasonable multiples.

Combined with the growth potential the industry could see over the next several years from an economic recovery and emerging markets growth, I think these stocks are worth a look for the portfolios of income and growth investors alike.

The American and worldwide giant
Since undergoing a government-organized restructuring back in 2009, General Motors has carried the marks of shareholders destruction alongside its frequently politicized restructuring history. Although the "government motors" label was quickly given to GM and is still sometimes used by opponents of the auto bailouts, the U.S. government sold the last of its GM shares at the end of 2013, opening up the potential for new shareholder-friendly initiatives.

With around $27 billion in cash, GM has a lot of options available for itself. The instatement of a dividend for the first time since the old GM was reorganized is widely expected. This move would help to attract dividend-only funds, income investors, as well as rewarding existing shareholders. Share buybacks could also be in order. With GM shares trading at only 8.5 times forward earnings along with expected earnings growth over the next several years, GM would be repurchasing shares at a good value.

Moving forward
With the S&P 500 now trading around 17 times forward earnings, shares of Toyota Motor offer an attractive play in the automotive sector. While a little more expensive than GM based on a forward P/E ratio (8.5 times vs. 9.7 times), Toyota has a more stable history and its shareholders suffered far less in the last downturn. Additionally, Toyota pays shareholders a dividend yielding 2.1% and has a good record of doing so making this value investment suitable for part of an income portfolio.

An extensive line of hybrid vehicles has also given Toyota a hedge against a potential rise in oil prices. As automakers relying on big SUVs for their profits were hurt during the 2008 spike in oil prices, the Toyota Prius was in high demand and the automaker's other small cars were rolling off dealership lots. With oil prices still susceptible to economic and political factors, having an effective means of generating earnings even in the event of a sharp rise in oil prices makes Toyota a more conservative value investment.

Eurozone discount
The S&P Europe 350 index has significantly lagged the S&P 500 over the past year as many investors have remained hesitant to buy into the economically troubled region. This has created what I call eurozone discounts on some stocks.

One automaker I see as undervalued from the eurozone discount is Volkswagen . I also see this stock as one of my favorite eurozone investments, highlighting it in another article called "Finding Value in 2014: Europe." Not only does Volkswagen trade for a single-digit forward P/E ratio, but the stock also trades at a cheaper price-to-book value than many large automotive rivals.

Considering Volkswagen's worldwide footprint and growing presence in emerging markets, the eurozone discount seems unjustified. As the eurozone disappears during Europe's recovery and Volkswagen's earnings increase from greater worldwide sales, shares could have significant upside potential in addition to the current dividend yield of 1.7%.

Auto savings and growth
Despite major growth potential in emerging markets and the beginnings of a worldwide economic recovery, many automakers trade at a significant discount to the S&P 500. While General Motors, Toyota, and Volkswagen are some of my top picks for this industry, I see strong upside for the industry as a whole and remain bullish on Ford, Fiat, and Tata Motors as well. But even as value stocks, growth may be what drives these investments forward.

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Alexander MacLennan is long January 2015 $34 and $40 calls on General Motors and is also long General Motors Class B and C warrants. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security.
The Motley Fool recommends Ford and General Motors and owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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