After setting sales records for two consecutive years, the auto industry is looking at a relatively slower year. Nearly 18 million vehicles were sold over both 2015 and 2016, a feat which is unlikely to be repeated in 2017.
Previously, a combination of factors was driving the market higher. These include the likes of cheap fuel prices, easy credit, new models and an improving labor market. But the trend seems to be undergoing a reversal at the moment. As a whole, auto sales have declined on a year-over-year basis for five months in a row.
The last such decline, in May, has heightened concerns that the first annual slide in terms of sales in eight years is in the offing. It is widely believed that the reason for this reversal of fortunes is automakers’ unwillingness to pursue the approach they had adopted in the past. Instead of extending further incentives — a practice which was prevalent previously in order to hold up sales — automakers are focusing on profitability.
Stocks Under Consideration
In this context, it is important to determine which of the two traditional auto majors, Ford Motor Company F and General Motors Company GM are better placed at the moment. Both stocks carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Other auto stocks from the Zacks Automotive – Domestic industry which also carry a Zacks Rank #3 include Harley-Davidson, Inc. HOG and PACCAR Inc. PCAR.
The Zacks Automotive – Domestic industry has tasted success over the last one year, gaining 25.6% in the process. GM has underperformed the industry with a gain of 19.6% over this period. This is why it is stronger in terms of price performance since Ford has lost 13.4% over the same period.
Since the auto sector is capital intensive, the most appropriate ratio to value companies is EV/EBITDA. Additionally, it is the ideal metric to compare two companies within the same industry. Further, it is not impacted by differing capital structures and excludes the impact of non-cash expenses.
However, Ford is saddled with an even poorer debt-to-equity metric of 476.41. This round easily goes to GM, which has a debt-to-equity ratio of 196.7, which is lower than GM’s as well as that of the broader industry.
Return on Equity
This is a key metric of profitability and is utilized by investors to gauge the level of net profit returned relative to equity held by shareholders. Here, GM is clearly ahead with a return on equity level of 22.82%, which is higher than the industry’s level of 20.49%. Ford is at a disadvantage here, since its level of 19.36% is lower than the levels being sported by the broader industry and GM.
In the last one year period, Ford offered a higher-than-industry dividend yield. While the domestic auto industry offers a yield of 2.76%, Ford returned 5.32%. Since GM has a dividend yield of 4.38%, the marginally smaller auto stock wins this round fair and square.
Earnings History, ESP and Estimate Revisions
Considering a more comprehensive earnings history, Ford has delivered earnings surprises in two of the four preceding quarters. On the other hand, Ford has delivered earnings surprises in all of the four preceding quarters.
While Ford has an average earnings surprise of 4.7%, GM stands out with an average earnings surprise of 17.8%. GM is also at an advantage when considering Earnings ESP, since it has an ESP value of 0, compared to Ford’s value of -6.8%.
Our comparative analysis shows that Ford holds an edge over GM only when considering dividend yield. However, on all other counts, including price performance, EV/EBITDA, debt-to-equity, return on equity and earnings history, GM is clearly a better stock. Moreover, it carries an ESP value of 0 compared to Ford’s level of -6.8%, which is why it should be preferred over its prime competitor.