Buyer beware! Japanese and U.S. automaker stocks may appear attractive based on low valuation multiples, but these discounts come at the cost of higher risk. Ford (F) is leveraged, and General Motors (GM) is following suit. Japanese carmakers are experiencing a backlash from angry Chinese customers and counterparties. In addition, the Yen is an expensive and appreciating currency, which makes their low price-to-book ratios less attractive to American investors.
The Bait: Cheap Valuations
Financial metrics show how these stocks appear attractive on the basis of price multiples:
Ford and GM are Closet Financial Companies
Ford’s high leverage is characteristic of a financial services company, not a manufacturing company. This, it is useful to think of it as an auto-loan company that also makes cars.
General Motors is following Ford’s lead by levering its balance sheet and acquiring more financial operations.
General Motors’ subsidiary GM Financial is buying Ally Financial’s European and Latin American operations for $4.2 billion. For Ally Financial, this follows a similar sale of its Canadian and Mexican operations in May in efforts to raise funds for faster repayment of US bailout funds. Also in May, Ally Financial’s mortgage unit Residential Capital filed for bankruptcy and recently the court judge approved the sale of its operations to Walter Investment Management and Ocwen Financial for $3 billion. Another $1.5 billion of the loan portfolio is offered for sale to Berkshire Hathaway. To continue reading, click here.