Investment Thesis
In my opinion, investing in the Automobile Manufacturers Industry comes with relatively high-risk factors attached to it. This is, among other factors, because the margins within the industry are relatively low when compared to other industries. Therefore, I would not invest more than 5% of an investment portfolio into companies from the Automobile Manufacturers Industry.
In this comparative analysis on Ford (NYSE:F) and General Motors (NYSE:GM), I will show you why I consider GM to be the lower risk and higher reward investment when compared to its competitor. While I currently rate GM as a buy, Ford receives my hold rating.
When compared to Ford, General Motors has a slightly higher EBIT Margin [TTM] (7.66% compared to 4.85%) and shows higher Growth Rates (GM's Revenue Growth Rate [CAGR] over the past 3 years is 4.53% while Ford's is 0.46%). Moreover, GM has a significantly lower Total Debt to Equity Ratio (160.36% compared to 325.42%), indicating that it's the lower risk investment between the two. All of these metrics underline my theory that GM is the slightly more attractive investment in terms of risk and reward.
Furthermore, through his holding company Berkshire Hathaway (BRK.A) (BRK.B), Warren Buffett is invested in GM, which can be interpreted as an additional quality signal for investors. This, once again, strengthens my investment thesis to select GM over Ford.
Ford and GM's Performance within the past 12-month period
Within the past 12-month period, the S&P 500 has shown a Total Return of -4.78%. In the same time period, Ford's Total Return has been -24.54% and GM's -15.66%. The Total Return of Ford and GM when compared to the S&P 500, confirm my investment thesis that an investment in the Automobile Manufacturers Industry comes with relatively high-risk factors. In addition to that, my theory that GM is the less risky investment when compared to Ford, is underlined by the graphic below showing the performance of both companies within the past 12-month period.
The Valuation of Ford and GM
At GM's current stock price of $39.22, my DCF Model shows an upside of 29.30% for the company. At Ford's current stock price of $11.87, the same model shows an upside of 33.60%.
When considering the P/E [FWD] Ratio of both companies, it can be highlighted that GM's Valuation is currently slightly lower than Ford's: GM has a P/E [FWD] Ratio of 6.95 while Ford's is 7.62, indicating that GM is the slightly better pick in terms of Valuation.
When considering the Price / Cash Flow [TTM] Ratio, it can be further highlighted that GM seems to be the more attractive fit right now: while GM has a Price / Cash Flow [TTM] Ratio of 3.41, Ford's is 7.02. This demonstrates that GM is more attractive when considering the price you pay for the stock compared to the Cash Flow it generates.
Fundamentals: Ford vs. GM
At the time of writing, GM has a slightly higher market capitalization when compared to Ford: while GM's market capitalization is $57.03B, Ford's is $48.67B.
In terms of Profitability, GM is also ahead of Ford: GM's EBIT Margin of 7.66% (compared to 4.85% for Ford) as well as its ROE of 14.06% (compared to Ford's -4.69%) are significantly above its competitor, indicating that GM is the better buy for investors when it comes to Profitability.
When studying the companies' Revenue Growth Rate [CAGR] over the past 3 years, we can see that GM is also ahead of its rival: GM's is 4.53% and Ford's is 0.46%, indicating that GM is the better fit when considering Growth. The same is confirmed when having a look at the Revenue Growth Rate [CAGR] of both companies over the past 5 years: while GM's is 1.49%, Ford's is only 0.16%, providing, once again, evidence that GM is the better pick in terms of Growth. This is further underlined on further inspection of the companies' Revenue Growth Rates [YoY]: while GM's is 23.41%, Ford's is 15.93%.
Ford's Total Debt to Equity Ratio of 325.42% is significantly higher than GM's (160.36%), which serves as an indicator that Ford is the higher risk investment of the two companies. In the risk section of this analysis, I will dive deeper into the risk factors that come along with an investment in these two automobile manufacturers.
Ford GM General Information Ticker F GM Sector Consumer Discretionary Consumer Discretionary Industry Automobile Manufacturers Automobile Manufacturers Market Cap 48.67B 57.03B Profitability EBIT Margin 4.85% 7.66% ROE -4.69% 14.06% Valuation P/E GAAP [FWD] 7.62 6.95 Growth Revenue Growth 3 Year [CAGR] 0.46% 4.53% Revenue Growth 5 Year [CAGR] 0.16% 1.49% EBIT Growth 3 Year [CAGR] 307.79% 23.03% EPS Diluted 3 Year [CAGR] NM 10.28% Income Statement Revenue 158.06B 156.73B EBITDA 14.14B 17.82B Balance Sheet Total Debt to Equity Ratio 325.42% 160.36%
Source: Seeking Alpha
Ford and GM according to the Seeking Alpha Factor Grades
When considering the Seeking Alpha Factor Grades, we can see that GM is rated higher than Ford in terms of Momentum (B- rating compared to a D+) and EPS Revisions (A- rating compared to a D), thus strengthening my belief that it's the more attractive choice for investors.
Ford and GM according to the Seeking Alpha Quant Ranking
According to the Seeking Alpha Quant Ranking, GM also seems to be the better choice when compared to its competitor: while GM is ranked 10th out of 31 within the Automobile Manufacturers Industry, Ford is ranked 17th.
Within the Consumer Discretionary Sector, GM is ranked 128th out of 543 while Ford is ranked 232nd. The Seeking Alpha Quant Ranking once again strengthens my confidence that GM is currently the better buy for investors.
Risk Factors
I see the risk factors being higher for Ford investors than for those who invest in General Motors. My opinion is based on the following data below:
Ford's Total Debt to Equity Ratio of 325.42% is significantly higher than General Motors', which is 160.36%. This provides evidence that General Motors is the lower risk investment out of the two. The same is confirmed when we look at the companies' EBIT Margin [TTM]: while GM's EBIT Margin [TTM] is 7.66%, Ford's is only 4.85%, indicating that a recession could have a stronger negative effect on Ford.
My theory that GM is the lower risk investment for investors is also confirmed by taking a closer look at the companies' 24M Beta and 60M Beta: GM's 24M Beta Factor of 1.46 is lower than Ford's (1.57). In addition to that, its 60M Beta Factor of 1.38 is also below the one of Ford (1.52). Both serve as additional indicators that GM is the lower risk investment between the two Automobile Manufacturers.
My assessment with regard to the risk factors is also supported by the results of the companies' credit ratings from Moody's: while Ford receives a Ba2 from the rating agency, GM gets a slightly higher Baa3 rating.
As mentioned at the beginning of this analysis, I consider the risk factors of investing in the Automobile Manufacturers Industry to be relatively high in general (which is also supported by the companies' relatively low EBIT Margins). For this reason, I would like to reiterate that I would not invest more than 5% of an investment portfolio into companies from this Industry.
Conclusion
Several metrics that I have shown in this comparative analysis on Ford and General Motors indicate that GM currently seems to be the better risk/reward investment.
General Motors has shown significantly higher Growth Rates than Ford: while GM's Revenue Growth Rates [YoY] is at 23.41%, Ford's is 15.93%. Furthermore, GM's Revenue Growth 3 Year [CAGR] of 4.53% is also higher than Ford's (0.46%).
Additionally, different metrics indicate that GM seems to be the less risky investment: compared to Ford, the company has a higher EBIT Margin [TTM] (7.66% compared to 4.85%), a lower 24M Beta (1.46 compared to 1.57) and a lower Total Debt to Equity Ratio (160.36% compared to 325.42%).
All of these factors strengthen my confidence that General Motors is currently the better pick between these two Automobile Manufacturers.
Author's Note: which of these two companies from the Automobile Manufacturers Industry do you currently prefer? Do you own either of them?
This article was written by
Frederik Mueller
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I specialize in constructing investment portfolios aimed at generating additional income through dividends. My focus lies on identifying companies with significant competitive advantages and strong financials that can provide you with an attractive Dividend Yield and Dividend Growth, thus enabling you to augment your dividend income annually. By combining high Dividend Yield and Dividend Growth companies, you can gradually reduce your dependence on the broader stock market fluctuations.I also assist you in achieving a well-diversified portfolio across various sectors and industries. This diversification strategy aims to minimize portfolio volatility and mitigate risk. I also suggest incorporating companies with a low Beta Factor, which further contributes to reducing the overall risk level of your investment portfolio. My suggested investment portfolios commonly consist of a blend of ETFs and individual companies, emphasizing broad diversification and risk reduction.The selection process for high dividend yield and dividend growth companies within the investment portfolio is meticulously curated. I prioritize the pursuit of total return, encompassing both capital gains and dividends, rather than solely focusing on dividends in isolation. This approach ensures that your portfolio is designed to maximize returns while considering the full spectrum of potential income sources. By leveraging my expertise, you can benefit from a well-crafted investment portfolio that aims to generate extra income through dividends, while reducing risk through diversification, and prioritizing total return.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of BRK.B either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
