Related topics: General Motors, value stocks, Toyota, automotive, economy
After peaking in the 1950s, General Motors (GM, news) began a long descent that ended when the automaker filed for bankruptcy in 2009.
Toyota Motor (TM, news) saw an opportunity to grow as GM stumbled, but the Japanese automaker recently hit its own roadblocks over quality controls. Toyota's slump has persisted, while GM, in the eyes of some on Wall Street, has been on the road to redemption since exiting Chapter 11, with financing partially provided by the U.S. government. The reorganized GM was listed Nov. 18 on the New York Stock Exchange and other major exchanges with the world's biggest initial public offering.
Should you buy shares of either of these companies?
Recent financial performances suggest that GM is definitely the winner here, with a net profit margin of 3.5%, higher than Toyota's 2.5%.
The Detroit company tripled its profit in the first quarter on higher sales, though the advance was mainly driven by sales of stakes in two former affiliates. It was the fifth consecutive profit posted by GM since it emerged from a taxpayer-funded restructuring that was used to shed unwanted assets, four of its eight brands and much of its debt. The carmaker is still 41% owned by the governments of the United States and Canada.
GM is now a much smaller company: Sales last year totaled $136 billion, which helped generate a $4.7 billion profit. Toyota has reported $242 billion in sales over the past 12 months, which helped produce a $6.1 billion profit.
But GM is poised to reclaim the top spot in global market share after Toyota was forced by the March earthquake and tsunami in Japan to cut vehicle production by 500,000.
Toyota's reputation in the United States took a hit after it recalled more than 10 million vehicles because sticking accelerator pedals and faulty floor mats led to some reports of sudden, unintended acceleration.
Even before the recalls, some analysts said the competition was catching up with Toyota. GM's Malibu is getting better reviews than the formerly GM-beating Toyota Camry.
Moreover, GM is gaining share in China. Company officials expect to sell 5 million vehicles in the world's biggest automobile market by 2015, double GM's current total. Toyota has been slower to invest in Chinese factories and to market smaller, less-expensive cars there.
Investors want to know whether the companies have put their management troubles behind them. GM found itself in bankruptcy because of five failures: poor financial decisions, uncompetitive vehicles, an unawareness of what rivals were doing, a lack of innovation and management that operated in a bubble.
Since its restructuring and emergence from bankruptcy, it looks as if the company has changed for the better.
Toyota recognized GM's weakness as an opportunity to grow much faster to overtake GM. But in focusing on that goal, the automaker uprooted itself from the very strengths that enabled it to become No. 1 -- specifically, its system of mentoring young engineers that ensured a stream of ever-higher-quality vehicles.
Of course, history should not drive your investment decisions now. Instead, consider using the price-to-earnings-to-growth (PEG) ratio, which compares a stock's market valuation to its forecasted earnings growth. By this measure, if a stock trades at a PEG of 1 or lower, it is reasonably priced. Higher than that, and it looks overvalued.
Here are the results of a recent analysis of GM and Toyota:
- GM -- 0.40. It traded at a P/E of 11.1 on earnings forecast to grow 27.4% to $5 a share by 2012.
- Toyota -- 2.56. It traded at a P/E of 55.7 on earnings expected to grow 21.8% in the next five years.
At these PEG levels, buying GM stock and shunning Toyota could be a profitable move.
This article was reported by Peter Cohan for InvestorPlace. At the time of publication, he owned none of the stocks mentioned.
