Cramer: Still Selling Toyota and Buying Ford

“…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.

Cramer: Still Selling Toyota and Buying Ford

About Ockham Research 645 Articles

Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

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