Despite their less than attractive status back in 2008, automaker stocks are coming back in a big way in 2010.
For the past week, Wall Street has been abuzz over the scuttlebutt that General Motors could be days away from filing an IPO, the first step toward becoming a publicly traded company once again.
If GM were to file with SEC this week, it would be an impressive turnaround for the company. Just over a year ago, the company submitted its Chapter 11 bankruptcy filings, selling off or winding down unprofitable brands, and transferring all of its valuable assets over to a new entity.
Last week, the new GM announced its largest profit in six years, delivering $1.6 billion in earnings before interest and taxes on $33.2 billion of revenue. But GM's announcements were mixed: The company announced that Chairman CEO Ed Whitacre would be stepping down from both of his positions in the company by the end of 2010, after orchestrating the once-beleaguered car company's turnaround. While Whitacre's departure isn't exactly out of left field , the 68 year-old telecom exec commuted to GM's Detroit offices from his home in San Antonio, Texas.
Despite the executive change, rumors on Wall Street still suggest that a GM IPO is forthcoming. Reports are surfacing that eight banks will be joint bookrunners for the offering. If that is true, it would mean GM's in the later stages of its pre-IPO work.
An early IPO makes sense right now, with current ownership of GM prodominently in the hands of U.S. and Canadian government agencies, old GM bondholders, and the company's employees. It's likely these groups will want to unwind their investments, with a strong exit; an IPO would provide just that.
While the chances that GM go public are clearly exciting investors, we shouldn't pass up on some
that already trade on major exchanges.
In the last few years,
has emerged as a Wall Street darling, avoiding the bailout and bust cycles that U.S. competitors GM and Chrysler fell victim to. But Ford's successes aren't just financial. The company has been making significant strides in quality and innovation with its vehicles, generating substantial buzz for the brand's ability to continue performing at a high level in 2010.
While Ford once shared the quality issues of its Detroit neighbors, the company was the highest-placing large automaker in the 2010 J.D. Power and Associates Initial Quality Study, an excellent indicator of the changes Ford has put into building better automobiles. Merging its model lineup globally should save considerable costs while bringing some of the company's most popular product offerings - like the 2011 Fiesta - stateside for the first time.
Like GM, Ford delivered impressive results with in its latest quarterly filings. The company earned pretax operating profits of $2.9 billion, a major improvement over its second quarter 2009 and first quarter 2010 numbers.
Ford hasn't shaken all of the less attractive vestiges of its former self, however. The company continues to carry a very large debt load with a junk rating that makes borrowing significantly more expensive for the company. As Ford continues to deliver strong performance, though, management should be able to start extinguishing debt, lowering its financial burden and cost of capital in the process.
Domestic auto producers aren't the only ones worth watching right now. A global cutback in car buying has created potential contrarian plays in even the most secure car companies. Take Japan's
Honda has a nearly unmatched brand reputation here in the United States, where the company enjoys more than 11% of the auto market. That brand positioning enables the company to sell cars with significantly less in the way of factory incentives and gimmicky sales tactics. It also means that the company's financing arm was less susceptible to sales pressures in crafting its lending criteria - a factor that's paid off in the post-credit crunch economy.
Unlike most other automakers, Honda carries vary little debt and owns a very diversified product lineup that includes generators, motorcycles, and lawnmowers in addition to its car business. The strength of Japan's yen is a problem that Honda will need to contend with as an exporter, though it's likely that the government will intervene at some point soon to devalue the currency. Ultimately, though, this company offers some impressive attributes to investors right now.
Another Japanese carmaker that offers a different outlook right now is
. The company is down more than 16% on the year at this point, plagued in part by the recall debacle that made headlines earlier in 2010. While much of the PR nightmare has been forgotten, customers are still leery of the brand, which needs to prove itself again to American consumers.
While some analysts expected Toyota's recall liabilities to be substantial, the company's litigation costs will likely turn out to be much lower, following more mature findings from regulatory agencies and waning concerns from new groups of car buyers. Right now, Toyota's black clouds could offer an attractive contrarian play to investors hoping to capitalize on a reversal of the massive underperformance Toyota shareholders have experienced this year.
To see this week's car stocks in action, check out the
portfolio on Stockpickr.
At the time of publication, Elmerraji did not hold positions in any stocks mentioned. Jonas Elmerraji is the editor and portfolio manager of the
Rhino Stock Report
, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including
, and has been featured in
Investor's Business Daily