The stock analysis this week is not a single stock. Reader Vic had a great idea and named Ford and GM. I think it makes sense to analyze both companies together.
If you want such a “Fundamental Quick Stock Price” analysis of a specific company, just write in the comments which company you want me to analyze.
The current environment
As the business model of the car manufacturers Ford and GM are probably well known, I would like to take this opportunity to discuss the future challenges for the companies briefly. These are enormous, both in the short term and in the long run. In the short-term, of course, we have the coronavirus. The lockdown measures taken by governments have triggered major economic disruptions and caused car sales to collapse. Global car sales are expected to collapse by 22% in 2020.
In the medium and long term, however, the automotive industry is facing much more enormous upheavals. On the one hand, of course, there is the ever-increasing electric mobility. Manufacturers like Tesla appear out of nowhere and show established companies how to drive the electronic revolution in the automotive sector. On the other hand, there are also the first signs of a complete mobility revolution that is changing the way we move. New models such as car-sharing or autonomous driving are particularly noteworthy here.
In other words, it is an uncertain situation that does not allow high valuations. On the other hand, the market does not always act in an understandable manner at present. It is, therefore, time for a fundamental review of the two companies.
In a comparison of the two car manufacturers, we see a clear winner in terms of sales development. Both in the last five years, and since 2011, Ford has been able to increase its revenues more than GM. However, you have to keep in mind that GM was bankrupt during the Great Recession and was practically newly founded.
Nevertheless, you can also see from the pictures above that GM’s revenues have recently fallen more sharply than Ford’s. We should keep this in mind when we look at how we assess the intrinsic value of both companies.
But let’s look at profitability first. Companies should not only grow but also be profitable. Profitability ultimately indicates how much of the turnover remains when all other costs such as taxes, depreciation, etc. are deducted. The difference between revenue and profit is the margin. Companies should have the highest possible margin (i.e., as much profit as possible should remain from revenue). First of all, take a moment to look at the margins of both companies:
Evaluation of profitability
We see here above all that Ford has a negative operating margin and a negative net margin. The operating margin shows you the percentage of operating profit as a percentage of sales. Usually, you take EBIT (Earnings before Interest and Taxes) for the operating profit. The net margin ultimately indicates how much profit remains from sales after a company has made all expenses (including dividends, share buybacks, etc.). Furthermore, you can see that Ford’s falling margin is a longer-term trend and not just a bad quarter. Such a negative margin implies that the company has to pay more than one dollar for every dollar of revenue. So you can see that this is a terrible sign because, without new debt, the company would go bankrupt. So here General Motors is the winner.
Price / Earnings ratio
Why you should be so careful with the P/E ratio, you can easily see in the chart below. It would appear that GM has a much higher valuation. But if you think that Ford is a bargain because of that, you’re wrong. Ford has simply made losses in the last quarter. In such cases, the P/E ratio does not help you because there are no profits.
The balance sheets of both companies do not look very good either. Both companies are quite indebted and have high debt ratios. Furthermore, the ratio is rising again, especially at General Motors. The debt ratio for both companies is over 80 percent. Large parts of both companies are thus financed by debt. Although interest rates are currently low, the debts and liabilities will have to be repaid at some point.
In addition, it becomes difficult to pay off debts when the economy falters. And it’s hard to predict when car sales will pick up again. It is therefore understandable that many investors are now selling their shares.
Alternative investment options
Of course, you should never look at a company in isolation, no matter how much you go into detail. In the second step at the latest, you must compare the company with its competitors (peer group). Here you will need to keep an eye on the following companies in particular:
Conclusion: The grade for Ford and GM
At the moment, I consider both companies to be a bad investment from a fundamental perspective. At least in the medium term, there is little hope for shareholders here. Above all, both companies need new economic upturn. But then they will first have to settle their debts. Accordingly, it will probably be some time before companies pay a dividend again. If you are looking for better stock investment in less cyclical companies, I definitely suggest the following defensive companies:
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