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.
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 growth has really been wide-spread, as their most recent sales numbers showed double-digit growth in all vehicle segments. The greatest growth was in the small vehicle segment, which grew 30%, and with higher fuel efficiency standards coming from the White House, Ford is poised for future growth.
Ford's has improved quality, and its selection of fuel efficient vehicles, which is driving growth.
Growth winner: Ford
When you strip away the numbers, and judge a stock by its intangibles, things get really tough. Let's start our auto analysis with the geographic footprint of these businesses.
Europe has been a nightmare for Ford in recent years, and European sales account for 20% of its business. GM European sales are just above 12% per year, which gives it less liability to the troubled economies of Europe. However, in its most recent quarter Ford showed progress in Europe, could this continent be turning the corner?
Next we take a look at management. Since taking over in 2006, Alan Mulally has reenergized Ford by making some really great, common sense, decisions.
His most notable successes were:
1. Shedding brands like Volvo and focusing on a smaller number of quality brands and vehicles.
2. Adapting to consumer demands for higher gas mileage vehicles by shedding many SUV's.
3. Taking on debt in 2006, which allowed Ford to exploit a positive image, by avoiding bail-out funds in 2008.
It would seem that Ford would be a slam-dunk winner in the management category, but it's not that simple. Afterall, Mulally has been a rumored favorite to become Microsoft's new CEO; if he left, Ford's future would be uncertain.
Further, due in-part to bailout help, GM has an improved balance sheet, and has a significantly reduced cost structure with streamlined brands. The company has done a great job of positioning itself to take on future tailwinds, which seem to be a constant presence in this industry.
This category could be considered a toss-up, but I'm betting that Mulally has instilled a winning culture at Ford that will last beyond his tenure.
Intangibles Winner: Ford (by a nose)
Foolish Face-Off Winner: Ford
This was a tough face-off, as both of these companies are doing a lot of things well. In the end, with value and growth being split, my decision comes down to my personal view of the intangibles.
Use this Face-Off as a starting point to do your own homework; ultimately your view of the varibable factors should drive your buying decision. Just remember, the best stock to buy is the one you will feel most comfortable holding through good times and bad.