Ford (F) vs. General Motors (GM): Which Auto Manufacturer Stock Will Drive Your Portfolio Higher?
The automobile industry is going through significant challenges as companies struggle to cope with the ongoing semiconductor shortages. Traditional automotive names are also battling to keep up with well-funded electric vehicle (EV) companies like Tesla (TSLA), Lucid (LCID), and Workhorse (WKHS) to provide consumers with alternatives to internal combustion engine (ICE) cars.
In their pursuit towards going all electric, Ford (F) and General Motors (GM) are investing heavily in this space. In September, Ford announced its intention to invest $11.4 billion to boost its EV product line, as well as their drive range. Similarly, General Motors (GM) is investing $35 billion in the transition.
In this article, I will compare Ford and General Motors to identify which stock is the better investment right now.
Like many companies, Ford and GM are facing major challenges as they deal with the ongoing chip shortages and logistics challenges. As a result, analysts expect that the two companies will see a significant decline in revenue and profitability in the upcoming quarters.
Analysts expect that GM’s revenue will drop from $35 billion in Q3 2020 to more than $28 billion in Q3 of this year. Ford’s revenue is also expected to drop from $34 billion to $32.9 billion in the same period.
The key drivers for the stock prices are how the two companies will pivot from manufacturing fossil fuels vehicles to electric cars. The two companies have already started building and selling electric cars and trucks but their sales volume is relatively limited.
Ford has unveiled its electric F150 truck and Mustang Mach-E. It expects to create electric versions of all its vehicle models in the coming years. Similarly, General Motors has unveiled several electric vehicles, including the Hummer and the company expects to have 30 EV model cars by 2025.
While Tesla has become the leader in electric cars, I believe that legacy companies like GM and Ford will have a role to play in this growing segment of auto manufacturers. Besides, the two companies have been in the industry for years and have created a substantial consumer base, along with dealership networks.
Another key catalyst that could propel General Motors stock higher is its subscription business. In October, the company announced that it will build a Netflix-style product by 2030. GM’s current subscription platform supports services like OnStar, a subsidiary of the company that provides in-vehicle security, emergency services and navigation. It expects revenue from these types of services to reach nearly $2 billion this year and will reach as high as $25 billion by the end of the decade.
Some analysts believe that this is a bullish catalyst for the stock. For example, Daniel Ives, the respected Wedbush analyst, said that he expects that the firm will make about $2,000 annually per vehicle through its software alone.
Ford vs. GM
General Motors and Ford are the two biggest automobile companies in the United States in terms of revenue. In 2020, GM sold more than 6.8 million vehicles globally while Ford sold about 4.2 million cars. However, the two companies have been selling fewer cars in the past few years. GM’s annual cars peaked at about 10.1 million in 2016 while Ford peaked at about 6.6 million in 2017.
In terms of revenue, GM has generated more than $139 billion in the trailing twelve months (TTM) while Ford has generated about $136 billion in the same period. GM is more profitable than Ford, with an EBITDA margin of 14% compared to Ford’s 7.75%.
It is important to note that the two companies have substantial levels of debt. GM has a total debt of more than $111 billion vs $24 billion in cash. Ford, on the other hand, has more than $148 billion in debt vs $25 billion in cash.
In terms of valuation, GM has a relatively cheaper valuation than Ford. Data shows that GM has a forward PE ratio of 9.75 compared to Ford’s 12.4.
So, which is a better buy between GM and Ford? In my view, I believe that GM is a better investment than Ford. First, while the two companies have similar annual revenue, GM is growing at a faster pace than Ford. In the most recent quarter, it had a 20% YoY revenue growth compared to Ford, which had about 5%. I also believe that its goal of doubling its revenue in the next 9 years is achievable.
Second, GM is relatively cheap compared to Ford as its stock trades at a trailing PE ratio of 6.8 while Ford has a multiple of 18. The forward multiples also show that GM is undervalued in contrast to Ford.
Finally, analysts believe that GM’s stock has more room to run from current levels. Data shows that the average price target for GM’s stock is about $70, which is substantially higher than the current price of $57. On the other hand, the average estimate for Ford stock is about $15.36, which is where the stock is currently trading.