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Foolish Face-Off: Ford vs. GM

Adem Tahiri
November 18, 2013

Just five years ago, auto giants General Motors (NYSE: GM) and Ford (NYSE: F) appeared to be on the brink of disaster. It's hard to believe, but in that quick time-frame, the auto industry is roaring again. While GM and Ford have followed a similar formula to recovery, focusing on quality products and healthy balance sheets, which of these large U.S. auto makers has turned the corner for good?

It's time for a Foolish face-off! Here's a side-by-side comparison of these two titans of auto industry. 


When you consider what US auto sales have done in recent years, it's a bit surprising how low the valuations of auto stocks are. Just look at this chart, which shows how much faster auto sales have risen than the valuations of these two stocks. 

US Auto and Other Motor Vehicle Sales Chart

US Auto and Other Motor Vehicle Sales data by YCharts.

It's hard to understand why automakers are so unloved right now. Perhaps it's the stigma of uncertainty, from the auto bailout, or even the exposure that these companies have in Europe. Whatever the reason, we'll want to dig a bit deeper to see if there's still some value to be had. 

Everyone has a different approach to value. I believe that valuation only makes sense if it's relative, and I prefer not to look at price-to-earnings in a vacuum. In my world, a stock with a P/E of 20 that's growing at 30% is cheaper than a P/E of 10 on a 5% grower. 

The reason that I believe in a "relative" approach to value is simple, it's because numbers aren't static.

If a company has a P/E of 10 but its business is in decline, that P/E may soon be 20 or 30. On the other hand, a business with a "higher P/E" that is growing at 30%, can do quickly become a bargain.

Two relative valuation tools, that I prefer, are the price-to-earnings growth ratio (PEG), and the price-to-sales ratio (P/S). 

In terms of relative value, both stocks look dirt cheap, but GM beats out Ford with a rock bottom PEG of 0.64, and a P/S ratio of 0.35. Ford looks good as well with a P/S ratio of 0.46, and a PEG of 0.7, but the winner is GM

Value winner: GM


The average age of all U.S. auto's is 11.4 years, and it's expected to grow 20% by 2018, at some point these vehicles will need to be replaced. This is bullish for the sector overall, but who will capture that growth?

For the moment, Ford seem to be driving ahead of GM. Ford's most recent quarter showed revenue growth of 12%, while GM's revenue only rose 4%.

GM's revenue also stayed relatively flat from 2011 to 2012, and it is on track to rise only between 3-4% this year. While Ford's revenue was also flat the past two years, it is on pace to rise well over 10% this year. Further, Ford's most recent earnings grew by 0.15 cents per share, year over year, and earnings beat estimates by 19% as well. 

Ford's sales g