Tesla Inc (NASDAQ:TSLA) has been a revolutionary force in the auto industry, pushing aged giants like Ford Motor Co. (NYSE:F) to change with the times. I'll concede up front that Tesla CEO Elon Musk is a brilliant visionary, and that Tesla's Models S, X, and 3 are beautiful vehicles. But let's ignore all of that for a moment and do a quick analysis of Tesla versus Ford the way Benjamin Graham might have in his investing classic The Intelligent Investor. This fun little exercise is more telling than many investors would like.
New vs old
Tesla has been around as a public company since the middle of 2010, so it can't possibly live up to some of the expectations of what Graham called a defensive investor. For instance, it hasn't been around long enough to have a long history of paying dividends and years' worth of positive earnings. Tesla has never paid a dividend or turned an annual profit, and its only black ink thus far came in the third quarter of 2016.
Ford, on the other hand, has been in business since roughly the introduction of the automobile. While Tesla is clearly changing the auto industry as you read this, Ford has proven that it can change with the auto industry over time. Today that even includes working on vehicles that aren't powered by gasoline. While Ford has strung together a handful of profitable years, it's only been in the black in eight of the last 10 years. And its earnings today aren't materially different from those it posted eight years ago, when it got itself back into the black. Dividends, meanwhile, have only been paid in five of the last 10 years. Ford would be a tough sell for a defensive investor as well.
Let's be "enterprising"
To be honest, both Ford and Tesla would be off my radar at this point, because I err on the side of being a defensive investor. But let's keep going and dig a little deeper, under the assumption that we're leaning toward Graham's enterprising investor archetype. And that means taking a look at valuation.
Since Tesla isn't profitable right now, we can't use price to earnings ratios. That's telling in and of itself. Ford's P/E, meanwhile, is around 11. That's higher than its five-year average of 9, but below the industry's 14. Auto sales can be a bit cyclical, so you have to be careful with the P/E here. At this point I wouldn't call Ford's P/E wildly out of line, but I wouldn't say it's a cheap stock either.
Price to cash flow is another measure on which Tesla can't be examined. In fact, it's hemorrhaging cash today as it builds its business. That has some investors worried that it will run out of cash as early as next year, which means tapping the capital markets again. It probably won't have a problem doing so at this point, but if there's a market dislocation liquidity could quickly turn into an issue. The problem here is that Musk has huge plans for Tesla (such as introducing a new Roadster and entering the long-haul truck market), all of which cost a lot of money. So there's really no end in sight to the cash burn. Ford's price to cash flow ratio is 2.7, below its five-year average of 4.2. On this measure Ford looks relatively cheap.
Price to book value is up next, a metric on which we can finally take a look at Tesla. The electric car maker's PB ratio is around 11, well below its five-year average of nearly 33 but also well above the industry's average of 1.5. Tesla is definitely cheaper than it was not too long ago (the stock is roughly 17% off of its recent highs), but it is far from cheap. Ford's PB ratio is 1.4, roughly in line with the industry but below its five year average of of 2.5. Ford's price to book ratio doesn't suggest overvaluation or a bargain basement price.
Tesla looks roughly similar valuation-wise when examining its price to sales ratio. The metric is currently at 4.8, well below its five-year average of 11.6. But the industry's average is just 0.6, so Tesla may be inexpensive compared to its recent past, but it is definitely not trading at bargain prices. Ford's PS ratio is 0.3, half of the industry average and just a touch below its five-year average of 0.4. Ford looks relatively cheap, but not enough to stand out as a great deal compared to its own history.
The winner is...
I've already said that my defensive bent would keep me away from both Ford and Tesla today, despite Ford's hefty 5% (or so) yield. But I also believe that even those who are more aggressive with their investments should also take a pass on both Ford and Tesla. Ford looks like the better deal, but neither really stands out as a good option if you look at the pair the way Benjamin Graham might have.
That said, I know that investors aren't buying Tesla thinking about valuation. The story is all about growth. But at what price? Sometimes it's worth stepping back from the story of a stock like Tesla to examine the raw numbers, and those numbers today suggest to me that there are better places to be looking for investments. But then I'd say the same thing about Ford...