Investors on the hunt for value have lately been poking through the automakers. Quite a few auto stocks have lagged the market over the last few years, as investors concerned about technological disruption and peaking sales have looked elsewhere for growth.
But some automakers will survive and even thrive in coming years as self-driving vehicles and electric cars and trucks become commonplace. For some, those new technologies could provide a path to significant profit growth: That's the case that General Motors (NYSE:GM) has been making, and investors have bid GM's shares up quite a bit in recent months.
But what about GM's two old Detroit rivals, Ford Motor Company (NYSE:F) and Fiat Chrysler Automobiles (NYSE:FCAU)? Both are trading below 10 times earnings, the valuation we'd expect for an automaker in good times.
Is there value here? If so, which is the better buy?
Ford and FCA: By the numbers
Let's start with a look at some key numbers. Note that FCA's financial results are shown in euros. As of Dec. 19, 1 euro = about $1.18.
|Vehicles sold||6.57 million||4.73 million|
|Earnings before interest and tax (EBIT)||$8.8 billion||6.71 billion euros|
|Earnings per share||$1.60||2.06 euros|
|Automotive debt||$16.2 billion||18.6 billion euros|
|Cash and available credit lines||$37.0 billion||19.5 billion euros|
There's a perception among investors that Ford is a lot healthier than FCA. I think there are two reasons for that:
- FCA has an awful lot of debt relative to its size (and its cash), and its credit rating is below investment grade;
- FCA's product quality continues to lag the overall industry, while Ford's has clearly improved over the last decade.
Both reasons are valid. But that said, one tried-and-true way to make money investing in auto stocks is to look for a turnaround story. Is it possible that FCA will pay off its debt and thrive? And what about Ford: Will it see its profits grow in coming years?
FCA has been on an upswing, but there are concerns
FCA CEO Sergio Marchionne likes to work from five-year plans. FCA's current five-year plan, presented in May of 2014, called for a global expansion of the Jeep brand, a relaunch of the Alfa Romeo brand as a competitor to the German luxury brands, and streamlined product portfolios for Dodge and Chrysler that would focus on high-profit vehicles (SUVs, muscle cars, and minivans.)
The plan has been tweaked a couple of times since, and FCA has fallen short of some of its more optimistic goals, but the company has come a long way since the plan began. Two numbers tell the tale: FCA's EBIT margin in the first quarter of 2014 was just 1.2%, and its debt stood at 27.8 billion euros, which exceeded its available cash by almost 10 billion euros.
What changed? Improved sales -- particularly of higher-profit vehicles and variants -- some compelling new products, and a sustained effort to pay down the debt. FCA's debt is still high, but assuming the global economy stays strong, it should come down significantly over the next couple of years.
Long story short: FCA's turnaround has been under way for several years, and it's more or less on track. But where does it go from here?
Ford: After a tremendous turnaround, some new concerns
The story with Ford is a little different. Most investors know that Ford already had a tremendous turnaround early in the decade led by now-retired CEO Alan Mulally. Under Mulally's hand-picked successor, Mark Fields, Ford enjoyed its two most profitable years ever in 2015 and 2016 and began making hefty investments in key future technologies like electric drivetrains and self-driving systems. But unlike rival GM, which has made clear that its future-tech will be profitable, Ford never explained how or when those hefty investments would pay off. That made investors wary.
Frustrated with the stalled stock price, Ford's board of directors sacked Fields in May of this year. His replacement, Jim Hackett, is a deep-thinking futurist who successfully revamped office furniture maker Steelcase before joining Ford to oversee its future-tech efforts. Hackett hasn't yet laid out a detailed plan for Ford, but it's clear that he's increasing the pace at which Ford is embracing those new technologies and mobility-related business models.
How and when will it all pay off for investors? We still don't know.
Is Ford or FCA the better buy?
GM has argued that its future-tech efforts will start to pay off within a few years, as it deploys self-driving electric vehicles in ridesharing service. It's clear that Ford is thinking along somewhat similar lines: It has confirmed that it plans to launch a self-driving commercial vehicle of some kind by 2021. With its deep understanding of the needs of commercial-fleet operators, it's likely that Ford will have a compelling product.
The challenge for Ford investors is in putting a dollar value on those future-tech efforts. But the challenge for FCA investors is explaining how the company will keep up in the future world at all, as it has no significant future-tech efforts of its own under way. (It hasn't had the money to fund them.)
Of course, FCA will probably be able to buy electric-drivetrain and self-driving technology from suppliers. But that approach is likely to squeeze margin, meaning that it's hardly a profit-growth story. Meanwhile, Ford has the tech, has a terrific brand, and it has something else that FCA doesn't: A fat dividend that it should be able to sustain through the next recession.
It's possible that FCA's next plan will show a profit-growth path that makes it a more compelling investment. But right now, Ford looks like the better buy.