Continuing the format of our last commentary, we discuss below our recent purchases of General Motors (GM) and Toyota (TM). FPCM believes that the auto industry will benefit from both cyclical and structural tailwinds, and that both GM and Toyota should be beneficiaries of such positive trends.
Why do you like the auto industry?
The global auto industry based on unit sales is in the early stages of recovery; driven by continued strong growth in developing countries and a return of demand in developed markets. For example, global auto unit sales fell from 66.7 million units in 2007 to 60.4 million units in 2009 of which North America and Western Europe accounted for more than 100% of the contraction, which was offset by growth in developed countries.
As the developed economies recover, auto sales should continue to grow thanks to pent-up demand and an aging fleet. By way of example, normalized US auto sales are roughly 15-16 million units per year. In 2009, unit auto sales in the U.S. were slightly more than 10 million. Outside the developed markets, the rise in GDP and consumer wealth in emerging countries is driving greater demand for autos for both personal and business use. China is the world’s largest auto market by unit sales.
Why GM & Toyota?
Based upon our research, FPCM determined that both GM and Toyota are attractive equity investments. GM and Toyota share several themes: inexpensive valuations; strong brands and product portfolios; leading global market share positions; and both companies are undergoing secular cultural and management transformations.
Toyota’s recent missteps are of a different nature from GM’s, but challenging as well. Toyota has faced multiple product recalls and lawsuits revolving around serious product defects in both its Toyota and Lexus brands. While the company initially responded in an ineffective manner, senior management has repositioned their communications and actions in order to move Toyota forward and to protect the company’s brands.
Recently, Toyota’s U.S. sales have been impacted negatively by both the contraction in the U.S. auto market as well as by the negative publicity regarding the company’s product recalls. Despite the product recalls and negative publicity, FPCM believes that Toyota’s brands, manufacturing skills, and product innovation are durable competitive advantages and that the company’s recent product recall woes are short-term in nature.
What are GM and Toyota worth per share?
Both GM and Toyota trade at sizable discounts to their peers. Appreciating that both companies operate in a very cyclical industry, we attempt to value both companies on a “normalized” or “mid-cycle” basis. In the near-term, both companies should experience attractive sales growth and margin improvement as the companies and peers benefit from resurgence in auto sales in the U.S. and European markets.
Longer-term, both companies are well positioned to continue to lead the global auto industry and generate attractive profit margins. Based upon FPCM’s research and valuation analysis, we believe that GM’s fair value range is from $50 - $70 per share and that Toyota’s ADR fair value range is from $100 - $120 per share. Currently, GM’s share price is roughly $31 and Toyota’s ADR share price is $83.
Disclaimer: Readers are advised that this commentary is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy. The information contained herein has been obtained from sources that we believed to be reliable, but Financial Partners Capital Management (FPCM) does not offer any guarantees as to its accuracy or completeness. Past performance is no guarantee of future results. The opinions expressed herein are those of FPCM, are subject to change without notice. Reproduction without written permission is prohibited. Entities including but not limited to FPCM, its officers, directors or employees may have a position, long or short, in the securities mentioned herein and/or related securities, and from time to time may increase or decrease such position or take a contra position.
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