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An investor's key guide to the global automobile industry

Part 6
An investor's key guide to the global automobile industry (Part 6 of 9)

Competitive advantage and earnings are key to the auto industry

Earnings and competitive advantage for GM, Toyota, and Ford

As you can see from the table below, the company with the highest gross margin among the three majors is Toyota, a company known for its lean manufacturing and low inventories and product demand. This provides Toyota a 15.5% gross profit margin versus Ford’s 12.8% and GM’s 13.2%. The industry median value of 16% is increased by BMW and Daimler, which have gross profit margins of 20.2% and 22.3%, reflecting higher average selling prices in addition to pursuing their respective forms of lean manufacturing. The overall profitability of U.S. manufacturers is slightly below the industry average of 4.8%, with Ford reporting 4.9% and GM reporting 3.4%. Toyota fares well in this measure, again due to its product demand and lean manufacturing.

AUTO PROFITABILITY RATIOS GM F TMEnlarge GraphKeeping our eye on earnings, we have to look at the industry for how much each company has to spend to develop, manufacture, and advertise its vehicles. Each manufacturer discusses a movement toward global platforms, with upper bodies adjusted to regional preferences and the reorganization and optimization of its manufacturing platforms so that the manufacture more closely aligns to demand—both existing and expected. It’s about how much revenue a company keeps, which determines its profitability. In this context, let’s review where GM, TM, and F are compared to each other for the most recent reporting fiscal year.

Relative measures become significant when you look at the dollar amount differences between Toyota and GM in terms of the scale of the two businesses. GM reported $155 billion in revenue in the year, while Toyota reported $267 billion revenue in its fiscal year 2013. Due to Toyota’s higher selling prices, more efficient operations, and lower pension fund costs, Toyota is able to invest more in its business. Toyota projects $9.4 billion for capital expenditures and $9.0 billion for research and development expenses in its fiscal 2014. This compares to GM’s reported $7.5 billion for capital expenditures and $7.2 billion for research and development in 2013. Both companies are using the cash to develop new automotive technologies and make their global manufacturing bases more efficient. Toyota is spending $1.5 billion more than GM. Toyota has a significant advantage in financing new projects and investing in efficient new plants as the global market shifts to China and Brazil and other emerging economies.

AUTO EPS GM F TMEnlarge Graph

Investors need to know what they’re getting when they acquire a share. A commonly reported statistic is earnings per share, or EPS, which is net income divided by the number of shares outstanding. This makes comparing companies consistent, as it’s on a per-share basis. The chart above presents GM, F, and TM, showing both past and future. GM, which exited bankruptcy in 2009, has fewer shares outstanding and a higher earnings per share. Toyota, which has been suffering from recalls, is expected to show significantly improved earnings after it gets past the recalls. Ford, which neither benefitted from bankruptcy nor has the costs of massive recalls, is anticipated to improve earnings in 2014 and 2015 with investments in new models and manufacturing globally. As investors anticipate great earnings from the automotive industry, the CARZ automotive industry ETF should benefit.

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