Stock Watch
Who Would Benefit if the Big Three Disappeared?
These four companies stand to profit from the demise of the major U.S. automakers.
By Ilana Polyak, Contributing Writer, Kiplinger's Personal Finance
December 3, 2008
The day before chiefs of the Big Three automakers went to Washington in mid November to plead for a $25-billion rescue package, Honda opened an assembly plant in southern Indiana. Detroit may be on life support, but there would be plenty of companies ready to pick up pieces of their market share if America's automakers were to go under.
And what a market share it would be to split. Together, General Motors (symbol GM), Ford (F) and Chrysler, which isn't publicly traded, account for 40% of the automobiles sold in the U.S. So who would benefit if the U.S. auto industry collapsed, and how could you cash in on that possible scenario?
Let's start with Honda (HMC). With vehicles that are perceived as offering good value and fuel economy, Honda would benefit immediately from Detroit's disappearance. In a weaker economy, consumers would likely gravitate even more toward fuel-efficient Civics and Accords.
Motorcycles, another big component of the Honda lineup, are selling well, particularly in emerging markets, where they are the primary mode of transportation for many families. "Their product lineup is much more tailored for this type of environment," says Patrick Becker Jr., chief investment officer of Becker Capital Management, in Portland, Ore. "We don't see a fast market-share gain for Honda, but we do see a continued execution of the company's business strategy."
Compared with its U.S.-based rivals, Honda is in much better financial shape. According to Standard & Poor's, Honda, with total long-term debt of $18.4 billion, has a debt-to-capital ratio of 28%. GM, with long-term debt of $38.3 billion, has a debt-to-capital ratio that's off the charts -- nearly 1,400%.
Honda's stock hung tough through September, then fell victim to the panic selling that afflicted stocks around the world. At its December 2 closing price of $20.50, Honda's American depositary receipts are 43% below their June highs. Analysts expect earnings per share of $2.24 for the fiscal year that ends in March 2009, giving the stock a price-earnings ratio of 9.
Toyota Motor (TM) is arguably the strongest of the Japanese automakers, but it wouldn't benefit as quickly as Honda from a collapse of the U.S. automakers. That's because its diversified product mix includes pickup trucks and sport utility vehicles. A customer who is thinking about buying a Dodge Ram, for example, may not be quick to buy a Toyota Tundra instead if Chrysler goes under.
Like Honda, Toyota is well positioned to weather tough times. Its ratio of long-term debt to capital is a modest 32%, and the company held $19.5 billion in cash as of September 30. "Toyota is a strong operator that delivers value without resorting to financial engineering," says Jeff Auxier, manager of the Auxier Focus fund.
Toyota's American depositary shares closed at $61.95, nearly 50% below their February highs. Analysts expect earnings of $3.47 per share for the fiscal year that ends in March. Reflecting rapidly weakening global economies, the average estimate has been slashed from $8.33 per share in just the past 90 days.
Losing three big customers doesn't seem like a positive, but Johnson Controls (JCI) could actually benefit from that situation in the long term. Johnson is a diversified manufacturer that produces, among other things, car interiors. But in recent years, says Morningstar analyst David Whiston, the Milwaukee company has been focusing more on its building-efficiency segment, which provides energy-saving technologies to homes and businesses. Automotive interiors accounted for 51% of total sales in 2007, down from 69% in 2005.
Because Johnson Controls is diversified, it's in a good position to withstand the disruption caused by the Big Three's demise, which would be much more harmful for smaller companies that serve only the auto industry. "Eventually, the company will be able to get more market share, albeit it may be of a smaller market," says Whiston.
At $16.67, Johnson shares are down about 55% from their past year's high. They sell for nine times estimated earnings or $1.82 per share for the fiscal year that ends next September.
It's a far cry from being in the car business, but Epiq Systems (EPIQ) clearly stands to benefit if the Big Three file for bankruptcy. The Kansas City, Kan., company provides software to bankruptcy trustees and offers back-office services for complex bankruptcy proceedings. Epiq is handling the claims-administration work for the Lehman Brothers Chapter 11 filing, the largest bankruptcy in U.S. history. And it played the same role for bankruptcy cases involving Enron, WorldCom and UAL, parent of United Airlines. "Epiq specializes in large bankruptcies," says Becker. "So it would have a shot at winning the business from a GM filing."
Epiq shares have performed extraordinarily well since the financial crisis accelerated in mid September. Since closing at $10.66 on September 12, the stock has rocketed 52%, to $16.15. Over that same period, Standard & Poor's 500-stock index plunged 32%. The stock isn't cheap, selling at 22 times estimated 2009 profits of 72 cents a share.
Reader Comments (23)
Posted by: SilverFox at 12/03/2008 07:36:48 PM
Unions are killing the whole country. No sense bailing them out, the unions will just start clamouring for a pay raise and more benefits. The rest of us scramble for healthcare and retirement. Let them scramble, too.
Posted by: Joe Honick at 12/03/2008 10:47:07 PM
Never thought I'd debate with another commentator, but Silver Fox is wrong if he or she thinks anyone in the unions, with whom I do debate, ever made one single marketing decision in the executive suite of the Big Three...or that anyone in the ES ever assembled a vehicle. Fact is those workers in the foreign companies get excellent benefits related to health if not to other areas. Fox should do a little recall about how unions came into being in the first place. I am hardly a defender of some of their practices, but the beatings many took from the Big Three goons at the outset helped to cause much of what resulted.
Posted by: TaxPayer at 12/04/2008 07:05:28 AM
Based on the big 3's complete lack of financial forecasting and planning, especialy after they flooded the market with over priced vehicles, how do they ever expect to be profitable? One of their "plans" IF they get the money is to freeze raises and bonuses next year? I work for a PROFITABLE Fortune 500 company that froze promotions and pay raises last year. If they had wanted to survive, they would have made deep cuts long ago to lessen the losses in a down market.
Posted by: TaxPayer at 12/04/2008 07:07:42 AM
Has anyone even asked why tax payer money should be used to bail out a PRIVATE company (Cerbus/chrystler). At least with ford or gm, I can get back some of my money back through stock holdings.
Posted by: oldeli at 12/04/2008 07:19:27 AM
Union leadership still doesn't get it---they haven't shown any willingness to truly help the Big Three and themselves...Many states and municipalities are facing major problems because of unions as well, but with Democrats in charge don't expect any help there..they would prefer to tax the average citizen than buck the unions.
Posted by: Michael at 12/04/2008 08:44:25 AM
You are worried about the unions? IE the WORKERS? The worker is the consumer in the economy - he makes the economy move up or down. If anything - screw the CEO with the FULL pensions, stocks, and unrealistic salaries as he goes to the bank on YOUR back. He can afford a downturn - not the workers.
Posted by: John S Grek at 12/04/2008 09:07:42 AM
I'm tired of hearing comments blaming unions for what's wrong with this country. Just like Enron, it was greed in the markets and mismanagement by banker/lenders that caused this problem. No one can ever win. When the Big Three were flush with cash, they were told to spend it. You can never satisfy the Kerkorians and Icahns of this country. Just start remembering how much good the American auto companies have done for this country, how much they helped after 9/11, see how much the Japanese companies helped, then go out and buy your import. It looks like nothing but greed, hatred and jealousy run this country. Just remember, this is a LOAN, not a bailout!
Posted by: DLloyd at 12/04/2008 10:03:46 AM
I read this morning that Unions were going to give back to the big three concessions one during past labor negotiations. Sadly, it is a matter of greed and the union labor forces have now priced themselves to near extinction along with the American "Named" automobile.
Posted by: Thrifty Tightwad at 12/04/2008 02:08:43 PM
I agree with the Siver Fox! When I retired, no health beneits at all!!! But I pay for my own. Also no 95% paycheck from Company when laid off. Just unemployment. This union needs to come down to earth where the rest of us live!!!!!
Posted by: Jose D. Roncal at 12/04/2008 02:29:06 PM
As a business executive and former CFO of major multinational businesses, one of the first lessons I learned was that top management, stakeholders and the markets do not like surprises. Allow me to repeat that, “they do NOT like surprises!” The reason that corporations have so many internal reporting mechanisms such as planning, forecasting and a daily or weekly cash flow statements is so they can avoid surprises. They conduct periodic risk reviews in order to mitigate any potential surprises and if necessary, take appropriate actions. GM clearly knew that revenues were down, market share was down, cash was burning at the speed of light and debt was spiraling out of control. With that in mind, it’s should have come as no surprise to anyone, that GM execs, (who arrived in Washington in a private corporate jet) requested a federal bailout—they need $4 billion just to pay their bills this month, or risk running out of money. They are seeking an additional $18 billion—$12 billion in loans and a $6 billion line of credit. Now that they’re on the hotseat, the company is finally making plans to shrink its work force by 34%, close nine plants, shut down 1,750 dealerships, focus on four of their eight current U.S. models, cut its debt in half and win new concessions from the UAW. They may have been considering these actions for awhile, but why would they put off outlining a plan until they were running out of cash? Why now? This is not the way to run a corporation. . . or has this become the new standard? The current board and top management have failed spectacularly, and in my opinion, the government should forget the bailout and allow the company to file for Chapter 11. However, my main concern is that the $18 billion is not nearly enough for GM to survive at current production levels anyway. Furthermore, using rough estimations, the restructuring process alone could cost GM $20 billion. Another fallout of the global credit crunch is that auto finance companies do not have enough money to lend to consumers. But GMAC Financial Services, GM's finance arm, has applied to become a bank holding company, making it eligible for a slice of the bank bailout pie, as well as giving them access to the Federal Reserve's discount window for emergency loans. The bottom line is that even if the government bails GM out, who will want to invest in them?...
Posted by: K. Mehta at 12/04/2008 06:58:18 PM
I agree! They need to get their costs down, more in line with Toyota with their plants in the South.
Posted by: John Kirwan at 12/05/2008 07:43:06 AM
That's how free markets work. Successful companies grow. Unsuccessful companies shrink or go away. Pouring money into unsuccessful companies is one reason why the former Soviet Union collapsed. Government control just doesn't work! Free markets are messy, but over the mid to long-term, they work. Let one or more of the big three declare chapter 11. Then they will have the freedom to get their costs in line with the market. Let them prune back operations to the point where they can make money. Then people willing to invest and the companies will grow again!
Posted by: Tom T at 12/05/2008 07:28:40 PM
Everytime I hear a financial analyst say that we should not worry about the big 3 because Honda or some other foreigner will pick us up, I want to scream. I worked for a major auto company for 35 years and was involved in engine preproduction control. The foreigners don't have engine, transmission, foundaries, stamping, etc over here, the Big 3 does. The foreigners don't do their R&D over here, they do it where their country headquarters are. The Big 3 have cold weather and hot weather testing areas in Minnesota and Arizona. I don't see Honda there. Then there is the big money. All big money goes back to Japan, Korea and Germany. It does not stay here. The American people are not being told the truth. They really have no idea how many jobs will be affected if the Big 3 go belly up. Then there are the taxes paid to local, state and Federal by Big 3 workers and support workers. The foreign companies don't pay anything compared to the American business and workers. Sen. Shelby takes good care of them. I thought he was an American. That will be gone. The Ameican people will pick up a percentage of the pensions because that is the law. The foreign plants are subsudized by their governments. Their governments pay their health benefits. When millions of Americans lose their health care, guess what people, you will pay....We have lost almost all of our factories and mills. Where are the kids going to work? Not everyone can go to college, and if they did, a college education would not mean much. So you will need to build more prisons. I think Ford will make it. They started downsizing before the others. They are bringing a lot of European models over here to build. This way they can have small and big vehicles for the fickle. Why Americans seem to want other Americans out of work is beyong my reasoning. Then again, I am a vet, I care about the country and those in it, and I respect the flag more than the almighty dollar. The last person I need are financial magazines, planners telling me about business and my IRA. If they were worth a damn, they would have seen this credit meltdown years ago and told us all to get out of the market...
Posted by: Gene Orndorff at 12/06/2008 02:54:45 AM
Let them go under. I was raised to understand that you will be held accountable for your actions. These clowns have had 30 years since the last major oil crisis to develop the kinds of cars people want. The big difference between Japanese car companies and the Big Three? Quality is a serious commitment by the Japanese, but is considered a necessary evil by American companies. Maybe one good company will emerge out of the bankruptcies.
Posted by: AAnthony at 12/07/2008 07:44:25 AM
Tom T, you need to come up to speed on what the transplant companies are doing here. Honda does indeed have engine and transmission production here, aluminum casting foundries, etc. They also do R&D here (R&D in Raymond OH). They own the Ohio Transportation Resource 8 mile test track. And they do hot and cold testing in Arizona and Minnesota, and the rest of the world as well.
Posted by: Ellen at 12/07/2008 08:54:20 AM
I have sat back and watched this whole mess unfold. Everybody is to blame. But what has happened to being a proud American who supports American business? It makes me sick to see these Asian vehicles on our roads...GM and Ford make everything from fuel sipping vehicles to large vehicles that can haul the family or a camper. The prices are comparable to all manufacturers. Another thing...I live in Cincinnati and Honda has a new plant in Southern Indiana...the starting wage?? $10.00/hour - can you live on that? If so, I am impressed. Also, just a little history. Today is Pearl Harbour Day (have any family members who are veterans???)...
Posted by: dion at 12/07/2008 06:46:51 PM
It seems apparent to me that the BIG Three figured that the bailout money was an entitlement and they could waltz right in and get it. GET IT? When the execs answers to the public officials inquiries were shall I say..way too lame..that really made the public see what kind of people are running these companies on which so many are dependent to live on. Well no big surprise now...
Posted by: Elaine at 12/07/2008 07:34:59 PM
I am a consultant who sees auto suppliers, medical device suppliers, and companies that 95% of Americans are not aware of. To let the Big 3 go under is insanity! The American public does not understand that the Japanese do not use American suppliers. They bring their own suppliers from Japan here to America. They are subsidized by the Japanese government. The money goes back to Japan. What have they done for the American public? Nothing! Their quality is not on par with American suppliers. I have seen it! It is false that the Japanese have better quality. They have just done a better marketing job! GM and Ford can not build automobile plants in Japan. Why should we give our country away? Wake up. Call your Congreesman and complain!
Posted by: Minix at 12/08/2008 08:06:46 AM
It would be great if all that love the Japanese would move there and take all their...Hondas and Toyotas with them.
Posted by: Ron Doty at 12/16/2008 09:00:44 PM
Seriously, GM's part quality is on par with the Japanese brands? Is that why I replaced the electric window switch and motor on our Chevy Astro an average of every 30,000 miles for the 150,000 I drove it? Oh, and the two-piece plastic intake manifold gasket replaced at 120,000, and the rear-end twice in 150,000? Our Sequoia with 60,000, never a switch, gasket or mechanical problem, all of which were problems within 60,000 on the Astro? Hmmmmm. Friends and family have had similar experiences with GM products. It's not just marketing.
Posted by: sienna at 12/18/2008 08:36:05 AM
'01 model..never in the shop except for oil chg etc. taurus cars needed monthly timing resets..seat fixins...remote mirror fixins..trans repair...
Posted by: Ford Man at 12/18/2008 12:34:05 PM
I've got a Ford Explorer with over 190,000 miles, and never had any major work done on it.
Posted by: brad at 01/20/2009 06:58:51 AM
This makes you wonder if they predicted they'd have a problem with a certain system on the product, and know you'd be back for replacement parts. I guess you would call some trick like this, "job security?" But whats going to happen when people stop buying this product, because it has too many problems?