Foolish Feature, 02/11/98: Stocks Fools Love, Chrysler, by Paul Larson

Stocks Fools Love
February 11, 1998

Chrysler
by Paul Larson (TMF Parlay)

Chrysler <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: C)") else Response.Write("(NYSE: C)") end if %>
1000 Chrysler Drive
Auburn Hills, MI 48326
http://www.chrysler.com
36 9/16 as of February 9, 1998

I'll leave picking the spicy, red-hot growth stocks to my Foolish associates this year. One of the stocks I adore right now is none other than a name just about everyone should know -- Chrysler. What attracts me to this giant company, which makes the Dodge, Plymouth, and Jeep brands? Basically, the company is sitting on a mountain of cash while the stock is trading on the cheap compared to its earnings and cash flow.

The stock is lower priced than any of the Dow stocks and has a fat dividend yield of around 4.4%. I'll take capital appreciation over a dividend seven days a week and twice on Sunday, but it's hard not to like those large, regular cash payments coming back to shareholders.

This is a stock that, were it listed on the Dow Jones Industrial Average, would be in the top spot in many of the "Dogs of the Dow" mechanical investing methods that have regularly outpaced the market, such as the Foolish Four. Alas, Chrysler is not in the Dow 30 even though it is larger than a dozen of the components of that index. Consider it a "Pseudo-Dow Dog" blue chip with which to buffer and ballast a portfolio.

Even though I'm calling the stock a dog, it really is a misnomer for the company. Cash cow is more accurate. Chrysler is currently hitting on all eight cylinders and has been throwing off some impressive profits for the past several years. The company earned $4.09 in the last twelve months, placing the stock at a trailing P/E ratio of less than 9. Analysts expect the company to earn roughly $5 this year, which should send this already low ratio even lower. If the market values the company on tomorrow's profits with today's rather low earnings multiple, we are still looking at a decent chunk of upside in the stock. Should the market give the company a double-digit P/E ratio, it will make owners of the stock that much more amiable.

All these profits have allowed the company to hoard cash to the tune of over $5 billion. Not only has the company been paying out handsome dividends recently, but Chrysler has also been extremely active in buying back its stock. The company bought back $2 billion worth of its stock in both 1996 and 1997 and plans on continuing the buyback at similar levels in the coming year. This would mean yet another 8% or so of the outstanding shares would be taken off the table in 1998. If the company can maintain profits, its earnings will be spread over that many fewer shares, thereby increasing the value of the remaining shares. Share buybacks are not nearly as apparent to shareholders as dividends, but they definitely do increase shareholder value when done properly.

The company does have a nominal amount of debt, but it is tiny when compared to its peers such as fellow "Big Three" automakers Ford <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: F)") else Response.Write("(NYSE: F)") end if %> and General Motors <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GM)") else Response.Write("(NYSE: GM)") end if %>, and even machinery maker Caterpillar <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAT)") else Response.Write("(NYSE: CAT)") end if %>. Chrysler recently refinanced some of its debt at more attractive rates that will reduce the company's interest expense even further. More importantly, the company's earnings are strong and its balance sheet is looking extremely trim and healthy as ever.

Of course, the auto industry has been cyclical in the past and is quite sensitive to economic conditions. Should the Asian Flu or the situation in Iraq turn the economy from sweet to sour, Chrysler is likely to see a bite taken out of its profits. Price-to-earnings ratios of 5 and below are not unheard of at the top of a cycle. It's always a risk to be aware of, but this is also the '90s we are talking about here. The Big Three are leaner and able to control costs much more effectively than in the past. The company is much more financially flexible than its peers and is the leanest and meanest of them all.

Speaking of mean, have you checked out some of the cars this company has the guts to make? It's hard not to love a company that puts the passion back into the driving experience by producing such cool cars as the Viper and the Prowler. If gas prices keep falling through the floor, maybe I'll be able to afford one of those monsters some day! I love those cars almost as much as I love the stock.

Next Stock Fools Love: Cymer

* A Stock to Love represents the opinion of one Fool and in no way should be taken as the opinion of either the Motley Fool, Inc., the company in question or representative of anyone or anything else other than that specific Fool's thoughts.