Auto Picks for Value Investors

11/22/2019 5:00 am EST

Focus: INDUSTRIALS

John Buckingham

Editor, The Prudent Speculator

John Buckingham is a leading money manager, best known for his expertise in value investing; he is also the editor of The Prudent Speculator. Here, he looks at two long-term values in the auto sector.

Honda Motor (HMC) turned in modestly better than expected fiscal second quarter earnings of $1.04 per share on revenue of $34.5 billion. Looking ahead, management lowered guidance across all of the company’s segments.

Instead of competing in every category, Honda remains focused on controlling costs through fewer trim offerings and common-size vehicle platforms.  Despite what arguably could be considered a less-than-stellar quarterly report, we think investors were relieved that the numbers were not worse.

After all, HMC sports a forward P/E ratio around 8.4, while the stock trades at 66% of book value and the net dividend yield stands around 3.2%, so there wasn’t a lot of good news baked into the share price.

That is fine by us, as we continue to like the geographically diverse revenue stream, exposure to emerging markets (China and India) and prudent financial position. Our target price has been bumped up to $35.

Auto and truck maker General Motors (GM) turned in a strong Q3, especially as the now-over UAW strike took $1 billion from EBIT and $0.52 from diluted EPS. That said, the company still turned in better-than-expected adjusted EPS of $1.72.

There is no doubt that the strike will also impact Q4, especially in the highly profitable pickup business, but we think the recent results demonstrate GM’s evolution as a company and think that management has done a terrific job of ensuring that earnings won’t collapse in the next cyclical downturn in auto sales.

While the competition is always fierce in the auto industry and input costs can be a wildcard, we believe that GM’s core business continues to shine.

We still like its solid balance sheet (more than $26 billion in cash and marketable securities), cost controls initiatives, ability to generate free cash flow, generous capital return programs, and electric and autonomous vehicle programs. GM trades for 6 times earnings and yields 4.1%.

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Auto Picks for Value Investors
11/22/2019 5:00 am EST

John Buckingham is a leading money manager, best known for his expertise in value investing; he is a...