Some of you probably remember the Yugo, a subcompact car built by Yugoslavia’s Zastava Automobile during the 1980s that sold for around $5,000.
Anyone who owned a Yugo certainly remembers the car’s unreliability — the object of much-deserved ridicule, the likely destination of the vehicle was the scrap heap after only a few years of use due to poor workmanship.
Now, Tata Motors (TTM), an India-based manufacturer of cars and commercial vehicles, is considering offering a $7,000-to-$8,000 car to the U.S. auto market within the next two years. Fortunately, that vehicle will likely be nothing like the Yugo, as Tata is known for producing reliable automobiles that address the financial constraints of young persons and less-affluent households.
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By volume, Tata Motors is the world’s fourth-largest truck manufacturer and the world’s second-largest bus manufacturer in the above-eight-ton category.
In addition to producing the world’s most affordable car — the Tata Nano — the company began manufacturing Jaguar and Land Rover during 2008 after it purchased those brands from Ford Motor Company.
Since its purchase of Jaguar, that brand has received several awards and accolades, including the “Best Executive Car” by J.D. Power and Associate’s United Kingdom survey and “Best Luxury Vehicle” by World of Wheels magazine in Canada. Meanwhile, the company’s Land Rover brand was rated by Diesel Car and What Car? magazine during 2010 as the “Best 4x4” vehicle.
On March 1, Tata Motors announced that its worldwide sales of commercial and passenger vehicles rose 14 percent during February as compared to the same month a year prior. The company reported that its domestic auto sales rose 10 percent, while its sales in other regions of the world rose 39 percent during February. Meanwhile, its auto sales for the full year of 2010 rose 27 percent, as compared to the year ended Dec. 31, 2009, with its exports of automobiles rising 73 percent during 2010.
Looking forward, the company announced on March 1 that it recently met with other auto manufacturers, including China’s Great Wall Motor Company, to build luxury vehicles in China, after the company reported that its sales of Jaguar cars and Land Rover sport-utility vehicles in China surged to a record in that country during 2010.
Although Tata Motors grew its unit autos sales at annual rates in excess of 12 percent during each of the past two fiscal years, and is on target to substantially increase its earnings per share for the fiscal year ending March 31, 2011, the company’s stock appears to be trading at a bargain price in relation to its expected earnings capacity. For example, as of March 25, TTM had a price/earnings to growth ratio of only 0.2, revealing that investors are undervaluing the company’s stock (in comparison, the S&P 500 Index currently has a PEG ratio of 2.3).
In light of these factors and developments, my research indicates that Tata’s stock prices will rise sharply throughout the remainder of this year.
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