“…Case in point, The Ford Motor Company. This company is blowing the doors off the business! 43% monthly sales gain. Stunning increase in market share from 14% to 17%. It just passed General Motors…

Yet how many times have you asked me about a different auto company in the “Lightning Round”, as right now I’m getting questions about Toyota almost daily. Are the short-term problems with Toyota an opportunity to buy the stock? I know that’s what you’re thinking. To which I say, how do I know if they are just short-term problems, for heaven’s sake? What if Toyota is a damaged company… This Toyota fiasco could be like the Audi sudden acceleration problem from a different era that gutted that firm’s reputation for years. If I were you, I’d sell Toyota, buy Ford.” — CNBC’s Mad Money 3/2/2010

Automakers recently released monthly sales reports for February, and as you might except given recent safety recalls and bad press Toyota Motor Co (TM) sales declined by 9% from a year ago.  Meanwhile, the primary beneficiary of that declining market share was Ford Motor (F) who saw sales improve by 43% over a year ago.  Admittedly, US auto sales were horrendous a year ago, but no company has made as much of a leap forward as has Ford under the leadership of Alan Mulally.

Jim Cramer has continually harped on his call to buy Ford’s preferred stock, which has turned out to be a very impressive call with those shares rising more than 700% in the last year, and as Cramer noted there is a dividend payout to be gained with the preferred share class.  Ford Motor’s common stock has also performed impressively, steadily gaining about 600% in the last year but with no dividend offered. 

At Ockham, we do not currently have research on preferred share classes, but it will come as no surprise following the stellar performance that our value-based methodology has Ford as Overvalued given the current fundamentals.  For instance, over the last ten years Ford has historically been priced by the market to deliver a price-to-sales per share metric of between .07x and .18x, but at this time the stock is trading well above that range at .36x.  Any investor can see that Ford is performing as well now is it has in quite some time, and sentiment on the stock remains bullish.  However, does that make it worth more than double the amount the market has typically been willing to pay for a given level of sales?  Maybe so, but it is clear to us that there are much cheaper stocks available.

As for Toyota Motor, we continue to have the stock as Overvalued but it is for different reasons.  The recent bad press has brought the stock tumbling from above $90 to the mid-seventies, but based on our methodology it may still have further to fall.  At this point price-to-sales are not a concern, but price-to-cash earnings currently stands at 19.7x while the historically normal range for TM is 8.7x to 13.3x.  The longer that this public relations nightmare continues the worse the effect on Toyota will be both in the short term and the long term.  This year’s financial results will take a hit, but also the damage to the brand is unknowable and has the potential to hurt future earnings.

On Tuesday, Cramer talked about whether or not viewers should consider taking profits in Ford and put them into Toyota’s stock.  His position is they absolutely should not, but value investors should consider dumping both stocks and finding cheaper alternatives which, according to our methodology, would not be difficult.

“This seems to be the quarter when automakers are turning in a better than expected numbers. As with many other automakers, here is what Toyota had today, a surprise profit in its quarterly earnings released early this morning, mid morning in Japan, a profit of $242 million that’s down 84% from the quarter a year ago. Sales, $50 billion, down 24%.

The thing to keep in mind with Toyota swinging to a profit is that it’s all largely based on government incentive programs around the world certainly helps. However, the strong yen continues to be a problem for it is offsetting the recovery that’s the reason why as Toyota was discussing its quarterly results, the company has said it has some concerns ahead of it. Toyota has cut its expected annual loss in half. Take a look at shares of Toyota. And again, like many of the automakers, benefiting from these incentive programs, boosting sales around the world. But Toyota has the added burden of the strong yen because it exports so many vehicles from Japan.” — CNBC’s Squawk Box 11/5/2009

Toyota Motor (TM), the world’s largest car company, joined Ford Motor (F) in reporting a surprise profit in the most recent quarter.  Toyota reported $232 million in profit following three straight quarters of losses thanks in no small part to government stimulus efforts around the globe.  Remember, during the U.S. Cash for Clunkers program, Toyota was one of the clear winners as their cars outsold all others. 

Toyota still expects to lose money in fiscal 2010 which closes in March, but they have improved their full year earnings guidance from a loss of $4.9 billion to a loss of $2.15 billion.  The better guidance is thanks to an improved sales outlook, which the company raised by 430,000 units to 7.03 million units.  Furthermore, the company continues to take steps to reduce costs in such notable ways as pulling out of Formula One racing.  These efforts are aimed at making the company leaner and hopefully profitable in a very uncertain environment.  Management cautioned that demand for autos would return slowly in many markets.  Additionally, the stronger yen cuts into profits from exports as Japanese made goods become more expensive in foreign markets.

When you consider the degree to which auto sales have fallen over the last year, it is pretty amazing that two of the largest automakers in the world were able to report quarterly profit.  Of course, the government stimulus that steered buyers towards the automotive sector has played a huge part in this, and the government gravy train has likely pulled away.  However, Toyota and Ford have gone to tremendous lengths in order to streamline operations and become more competitive.

We can applaud these automakers for their nascent turnarounds, but at this point we cannot recommend them as investments.  We recently downgraded Toyota to Overvalued because of there are still very significant challenges ahead.  The fact that Toyota may likely continue to deal with currency headwinds is just another concern, and one that Ford is not dealing with.  From a valuation perspective, the stock has begun to show progress, but the fundamentals have eroded so much over the past year that it is too expensive for us to recommend. 

“…And GM really making real progress with the SUV’s. I mean, I have got to tell you, they have really come alive in that segment, they now lead Ford in that segment.  Other winners just looking at everybody, not just GM, Cadillac is up. Ford Taurus sales up 41%. That’s a winner for Ford now and Mulally. The only Chrysler Model to be up month over month, 2008 to 2009 in October was the Dodge Caravan, sales of the Caravan were up 8%. All in all, guys, pretty good news for the auto sector this October.” — Fox Business Network 11/3/2009

With the exception of Chrysler, most major automakers saw improved U.S. sales performance in the month of October.  Despite analysts expectations of declining sales, Ford (F) and General Motors both surprised to the upside with gains of 3.1% and 4.1% respectively.  This was GM’s first year over year gain since January of 2008.  Nissan reported sales grew by 5.6%, and luxury brands like Mercedes Benz (DAI) and Porsche also had better results than last year. 

Of course, we are aware that these results are compared to some pretty wretched sales from the post Lehman collapse a year ago.  For example, GM sales fell 45% in October of 2008 largely due to a lack of available financing in the midst of the credit collapse.  However, it appears that this does show that perhaps the sales trends are starting to improve for automakers.  According to a survey of analysts by Bloomberg, the annual sales rate for the the month of October topped 10.3 million vehicles.  The 10 million vehicle benchmark is an important one and October is the first month of 2009 to top this benchmark without government incentives skewing sales results.

We are hopeful that these results suggest that stabilization in sales has begun, which would be better than we had expected in the wake of Cash for Clunkers.  Our readers will remember we were critical of the program’s effectiveness after September sales sagged deeply (Cash for Clunkers Saps Demand).  If this month does start stabilization, even at fairly low levels, we must give the cash for clunkers program a reprieve for the conventional wisdom. 

One thing to note is that this could just be a return to more normal replacement rate of vehicles after slower than normal sales for more than a year.  With an annual sales rate of 10.3 million light vehicles, it would take more than 23 years to replace all vehicles on the road in the U.S.  This is well in excess of the historically normal replacement rate for U.S. autos of about 13 years.  After such a horrendous year for non-government stimulated auto sales, just to get back to more normal replacement levels, there still may be some gas left in the tank for further sales improvement so to speak.

“The Nikkei, apparently a newspaper in Japan’s Wednesday edition is out already. They are saying Toyota will slash global production by 10% or one million vehicles as early as this fiscal year to raise utilization at underused plants. They will slash by 10% or one million vehicles. Shares are higher by 1.5%.” — CNBC’s Power Lunch 8/25/2009

Toyota Motors (TM) has announced they will be cutting production by 10% in anticipation of a slacking demand following the “Cash for Clunkers” program.  The program has been wildly popular as the first $1 billion appropriated for the rebates was used in just over a week, and then the next $2 billion allotted only last a few weeks longer.  All in all, the initial estimates state that through Monday a total of 625,000 vehicles were purchased for a $2.58 billion in vouchers.  The deadline for dealerships to submit their applications has been extended to 8pm EDT Tuesday, as many dealers have had staff working late into the night to complete the necessary paperwork.

The Car Allowance Rebate System (CARS) aka Cash for Clunkers program had dual purposes.  The first goal was to excite demand from the U.S. consumer, and hopefully help the struggling auto industry catch a break.  The other stated reason would be to replace so-called gas guzzlers on the road with more fuel efficient vehicles.  Toyota easily fit the bill for fuel efficiency and the most popular car sold through the program has been the Toyota Corolla.  Toyota claimed three of the top five vehicles for sales through the program, which undoubtedly will help them show their first increase in auto sales in the last 13 months.

With the program ending, dealers and automakers are left with one big question: Now what?  It is clear that the government’s efforts have borrowed demand from the future for use today.  The government rebates did not create demand, instead they incentivized buyers to act more quickly than they otherwise would’ve.  Now, most everyone who had thought about buying a car in the near future must have at least considered taking advantage of the program.  There will be fewer sales over at least the next few months as a result.

Toyota is the first we have seen announce production cuts, although we would not be surprised to see others follow suit.  Toyota, which currently has production capacity of 10 million vehicles per year, will be reducing that capacity to 9 million as soon as this fiscal year.  Furthermore, production volume is still excepted to fall well short of capacity, about 6.7 million vehicles this year.  There is simply no need to restock inventory as quickly when Economics 101 teaches us that sales are undoubtedly going to suffer.  Plant closures, shortened work weeks, and more layoffs are the obvious implications of such a slowdown.

From an equity perspective, we have a Fairly Valued stance on TM at the current price level.  We cannot blame them for slowing down their production capabilities, it only makes sense.  However, we have a hard time seeing a catalyst for sales improvement through the end of the year.  Toyota got probably the most benefit of any automaker from Cash for Clunkers, and time will tell how much it impacts demand going forward.  From an equity investor standpoint, there are some significant challenges in the months ahead that makes investing in them a bit too risky.

Now, no one will be surprised by the fact that General Motors (GM) was finally pushed into bankruptcy, most of us have seen this coming for the better part of a year.  However, how can this filing lead to the stock rising on the very same day, more than 10% in afternoon trading.  According to the Wall Street Journal, even the companies bonds are trading higher today.  It begs the question, why would anyone buy a company on the day it declares bankruptcy?  Even more confusing, how are their more buyers than sellers?  The simple answer it seems to me is that there is speculation taking the forefront on GM shares. 

“One thing I will say about GM, I would be a huge seller of that stock. If it were up to me, GM should have been liquidated. I think we would have seen a much better response or reaction created by letting this thing dissolve and letting the American spirit live on by breaking it up into better companies. Anyway, stay away from GM. I would definitely be looking at Ford. Ford is really cheap…It’s going to zero. I’m telling you, as far as General Motors, they buy you drinks in Vegas to take a chump this is a chump bet. If you’re buying General Motors, go to Vegas, fly out there. They’ll probably buy your drink and hotel room and [GM’s] not a good bet right now.” CNBC’s Power Lunch 6/1/2009

There has certainly been a lot of news surrounding GM shares recently as the company has negotiated the sale of its German unit, reworked labor contracts, and even pacified the bond holders to some extent.  However, equity holders very often are wiped out in bankruptcy proceedings, apparently there is a crowd of traders that believes that this bankruptcy will somehow be different.  Its not like there is insignificant volume as just past midpoint in the trading day volume is 5 times its average daily volume in the last 3 months, according to Yahoo finance.  Sure there may be some people out there that think that it is possible to make money in bankrupt stocks, but with the $172 billion worth of liabilities GM claims then logic just does not seem to support that notion.  So, could this be explained as all the institutional short sellers covering their positions?  Possibly, it seems to be the most reasonable explanation.  One thing is clear, any retail investor looking to ride this wave to a quick payout probably has better odds actually heading out to Vegas and seeing where the chips fall.