Auto Stocks: Ford vs Toyota

Recently, Toyota announced that it has sold its one millionth Prius Hybrid in the United States. By now, Toyota has proven that being green can be profitable and with gasoline prices header higher, the market appears to be downsizing their gas consumption and upgrading their fuel efficiency expectations. This makes the Prius Hybrid brand extremely valuable to the company going forward.

That is why Ford has also shifted their focus away from SUVs and toward smaller more fuel efficient vehicles. Go to Ford.com and you'll see immediately how this is affecting their image. On the front page, they advertise three vehicles getting more than 40 miles to the gallon. This includes the Fusion Hybrid, an answer to the Prius.

Now, when looking at stock prices, one must not think about the past, but must look to the future. How will this market realignment affect each company. Below are some recent financial metrics for each company.

You will notice that Toyota is trading at a premium to Ford. This is reflected in the Price to Earnings ratios, which are nearly double. This means stockholders are willing to accept half of the earnings yield from Toyota that they would expect from Ford. This valuation disparity is partly reflective of the fact that Ford is coming off of some years of poor performance. They recently decided to phase out the Mercury brand altogether. Recent profits could be attributable to artificially enhanced demand from the Cash for Clunkers program and a weak dollar.

Despite these facts, investors should consider Ford in a very decent position in the future. For instance, Consumer Reports named the Ford Mustang a top pick for 2011. The Ford Fusion, Lincoln MKZ, and Lincoln Navigator were also named among the toughest cars on the road. (Lincoln is a Ford Brand.)

If you are considering buying Ford stock, take a look at the LEAP contracts below.  Bullish investors can add additional leverage to their position through these options.  I like the $7.50 strike price LEAPS, as the time value premium is only $0.49 per share and the contract allows the holder to almost double any gains on the underlying shares.

Now, if you also want to reduce your cost, you have another option, you can sell out of the money calls against your current long LEAPs position.  This trade is bearish against your bullish position, but it is short-term bearish.  Sell the $16 May 2011 Call for $0.43 and you have offset almost all of the time value premium for your trade.  Originally, your total cost per share was $15.90 when you add the LEAP asking price to the current share price, but selling the OTM call reduces your cost.

You needn't worry about your shares being called either, as this will simply lock in your profits.  The downside of the Long LEAP position is the leverage. If Ford shares trade below $7.50 at expiration, the LEAPs expire worthless.