An elephant sits in the room with Ford (NYSE:F) and General Motors (NYSE:GM) by the name of Tesla (NASDAQ:TSLA), but the two titans of American auto manufacturing haven’t ceded to the up-and-comer just yet.
Instead, they’ve responded by re-tooling to target the EV market, and have been enjoying some considerable financial successes, so the question arises between Ford vs General Motors stock, which is best?
Is Ford a Good Stock To Buy?
Ford shares may have had a so-so year-to-date, climbing just 6.5% versus the S&P 500, which is up 17.1%, but you wouldn’t know it from the company’s impressive revenues in recent quarters.
Let’s start with the 3 year time horizon. Back in 2020, Ford reported revenues of $127 billion, a year-over-year decline of 18.4%. Fast forward to fiscal year 2022 and those numbers spiked to $158 billion on the back of 7.2% growth in 2021 and 15.9% growth in 2022.
Taking a quarterly view, some of the numbers look even more impressive. In Q1 2023, revenues climbed 20.3% year-over-year and last quarter they went up by 11.9%.
With the sales ship steadied, Ford has focused on converting those top line figures to income, and done so very successfully lately. Operating income is up a billion dollars from Q4 2022, and now sits at $2.2 billion.
The dividend remains elevated, too, perched at 4.91% for the moment. It’s questionable, however, whether that dividend is sustainable because the payout ratio is 120.79%, meaning Ford is dipping into reserves in order to sustain the payout. If Ford cannot boost its cash flows sufficiently, the dividend is likely to be cut.
So, investors looking to hop on board the Ford truck to portfolio gains should do so with full awareness that a dividend chop would likely trigger a share price dip too.
How Do Analysts Rate Ford?
According to 21 analysts covering Ford, the consensus target is for the share price to hit $15.23 per share. It must be said that our own calculations are nowhere near that level. We arrived at a fair value of $10.88 per share, implying downside risk of 12.7%.
Still, the P/E ratio for Ford is a reasonable 11.8x, though admittedly that is higher than the sector average of 9.2x.
If Ford is elevated now, can it still go higher?
How High Is Ford Expected to Go?
The most optimistic analyst estimate for Ford stock would put it at $23 per share, resulting in a 102% gain in share price from current levels.
Based on its market capitalization of $48.9 billion that would translate to a $98.7 billion valuation at the high end.
Is Ford a Buy or Sell Now?
In spite of recent successes, the road ahead for Ford remains rocky.
Ford has a return on invested capital of just 3.1%, a key indicator that the company does not possess a moat as Warren Buffett might describe it.
A company with a wide moat can often sustain returns on invested capital in the mid-teens whereas a business that sells a commodity in a competitive marketplace often struggles with price premiums for long periods. That appears to be the case for Ford.
On a valuation basis alone, if we were to answer the question is Ford a buy or sell now, the answer is a Sell based on a discounted cash flow forecast analysis.
Is GM a Good Stock to Buy?
Remarkably, General Motors generated an almost identical amount of revenues last year as Ford, posting $156.7 billion in sales versus $158 billion by Ford.
On a YoY basis, revenues climbed 23.4%, far outstripping the 15.9% growth reported by Ford management.
GM did an A+ job at converting revenues to operating income, which came in at just shy of $12 billion for FY 2022.
In its most recent quarter that number was $2.87 billion, though it tends to oscillate seasonally. For example in the Q3 2022 quarter it peaked at $3.8 billion.
Unlike Ford, which is paying a very high dividend of 4.91%, General Motors is conserving capital and paying just 1.10%. Its payout ratio is just 6.11%, meaning that management has ample room to increase payments to shareholders without compromising the balance sheet.
It’s clear that executives are bullish on the company’s prospects after authorizing a share buyback to the tune of $5 billion.
Is GM Stock Over or Undervalued?
GM’s share buyback scheme suggests that management believes GM stock is undervalued.
Analysts seem to agree, and have a $51.52 per share price target on the stock, a full 54% higher than where the share price sits today.
Similar to our analysis on Ford, we’re not as bullish on GM as the Street, however we do see upside of 11.2% based on a discounted cash flow forecast analysis.
General Motors’ P/E ratio is also much more compelling at just 4.5x versus 11.2x for Ford.
Like Ford, it also has a relatively low return on invested capital – just 5.1% – but again that eclipses Ford’s 3.1%.
Ford vs General Motors Stock: Which Is Best?
Comparing Ford and General Motors on key valuation metrics suggest GM has the edge. Analysts seem upside of 54% for GM versus just 23% for Ford.
A key concern for Ford shareholders is the extremely high payout ratio of the dividend. Ford has a payout ratio of 120% whereas GM’s payout ratio is just 6%. Yes, Ford is also paying a much higher dividend that makes its shares more appealing to dividend investors, but the sustainability of the dividend is very much in question.
On key metrics like P/E ratio, GM has the edge too, trading at just 4.1x versus 11.8x for Ford. So too does GM have the edge when it comes to returns on invested capital.
So, the bottom line is while Ford and GM generate about the same amount in revenues, GM is superior on a valuation basis and when it comes to operational efficiency. If we had to pick one, GM would get our vote.
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