Ford vs. GM: Which stock is better to buy? | Rare Techy
When General Motors (GM 0.26%) reported last week’s huge earnings beat — sales up 56% year-over-year, profits up 39% and free cash flow (FCF) at a whopping $4.6 billion — seemed to set the stage for a day of equally good news. Ford Motor Company (F 0.22%)which would reflect revenue one day later.
Things didn’t quite work out that way.
Ford by the numbers
When reporting earnings late Wednesday night, Ford’s numbers weren’t there completely horrible – they just weren’t as good as the GMs. Revenue of $39.4 billion was up 10% year-over-year, and Ford generated a respectable $3.6 billion in free cash flow.
But unlike GM’s rising FCF, Ford’s FCF number rejected 54%. Ford also reported a net loss for the quarter of $827 million — $0.21 per share. True, Ford would have been profitable but for a $2.7 billion non-cash impairment charge taken on its investment in autonomous driving company Argo AI, but even with that charge back, Ford’s pro forma profit for the quarter would have been just $0.30 per share. down 41% year-on-year.
Fortunately for shareholders, investors were in a forgiving mood last week. In the end, Ford shares ended the week up 8.8% — not quite as good as GM’s 11% gain, but not too shabby. The problem is, I don’t think Ford deserved to go up overall about their results.
General Motors vs. Ford
Why is the opposite? Let’s take a closer look at the relative performance of the two automakers.
First, and most obviously, Ford’s revenue increased a lot slower than GM’s in the quarter – 10% growth versus 56%. Second, and equally obvious, is Ford’s profit, both under GAAP (GAAP) and on a pro forma basis fell, while GM’s profits rose. And true, Ford’s GAAP loss at least came from the failed investment in Argo AI — but even without throwing that money into the hole, Ford’s adjusted operating profit margin for the quarter would have shrunk significantly, from 8.4% to just 4.6%. . By contrast, GM’s operating profit margin increased by 1 full percentage point — and is now nearly double Ford’s — at 9.1%, according to S&P Global Market Intelligence.
To further illustrate the differences in the companies’ relative trajectories, as I noted over the weekend, the company “gained market share in nearly every market where GM competes,” ultimately increasing its global market share by 80 basis points to 7.7%. . On the other hand, Ford’s market share is still neutral, only 4.9% – it has not changed compared to a year ago.
It wasn’t all bad news for Ford
That’s not to say that everything about Ford was bad news last week. Namely, the company generated significant free cash flow in the quarter. It may not have been quite as much cash as Ford was shelling out a year ago, but it’s enough, as Ford noted, that the company has already — in just nine months of this year — passed its free cash flow. purpose for healthy from 2022.
As management previously reminded us, it had targeted FCF in the $5.5 billion to $6.5 billion range this year. But in fact, the company has already earned $6.6 billion in the third quarter.
Factoring this new data into its guidance, Ford now expects to grow its operating profit by 15% this year ($11.5 billion) and by the end of 2022 with positive free cash flow of $9.5 billion to $10 billion.
Valuation of Ford stock
With a market cap of just over $53 billion, Ford’s stock currently trades at 5.3 to 5.6 times 2022 free cash flow estimates — depending on where it falls within that range. True, Ford has its problems. Compared to GM’s last quarter results, I think it’s clear that Ford isn’t performing as well as a company as his rival.
That being said, I see a lot to like in Ford stock as a share. After all, 5.3 times (or 5.6 times) free cash flow is cheap. At current prices, I could see myself buying Ford stock just for the company’s 4.5% dividend yield. And if Ford can deliver on its promise to grow profits by 15% through the end of the year and continue that performance beyond 2022, this stock could really be a home investment.
In short: Based on performance and price, both GM and Ford stocks look like long-term winners, but Ford is still the better buy.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.