Ford (NYSE:F) and GM (NYSE:GM) pop up on investors’ radar from time to time. Maybe they’re looking for a good old-fashioned American company to invest in. Perhaps they’re looking for a high dividend yield, something both GM and Ford stock have.
Maybe they see a sweet looking Camaro or Mustang and figure, hey they stocks have to be worth something, right?
“Something,” yes, but nothing with a rich premium.
It’s an issue that’s plagued both Ford stock and General Motors stock for years now. Will they ever get more reasonable premiums and should investors buy the stocks before that happens?
Evaluating Ford Stock
Ford currently trades at just 7 times this year’s earnings. The dirt-cheap valuation is rivaled by very few in the stock market, with the exception of names like GM and Micron Technology (NASDAQ:MU). However, unlike MU, Ford doesn’t have stellar growth.
In fact, it’s the opposite. Analysts expect revenue to grow just 1.4% this year, before contracting 1.2% in 2019. On the earnings front, they’re looking for a 12.5% contraction this year and a further 2% drop in 2019. Can you see why Ford doesn’t trade with the highest valuation?
Further, as we see companies like Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) rolling out autonomous taxi services (via Waymo) and even GM moving quickly in this direction too, Ford seems like it’s falling behind in the race. That doesn’t help factor any premium into its stock price.
The automaker already said it plans to eliminate cars from its future U.S. portfolio, with the exception of the Focus and the Mustang. That should help with profitability and give the automaker a margin boost.
Even though it bodes well for efficiency, some investors will surely worry about what it means for total revenue, a figure that will surely take a hit. Further, it will mean lower earnings for Ford Credit.
With all that said, investors who want to buy Ford stock can at least do so and not feel as though they’re overpaying. It helps that it pays out an almost 5.5% dividend yield.
I would caution investors about buying Ford stock “because it’s undervalued” though. A stock’s valuation is the market’s opinion of it. If it’s decided that Ford is worth 5 to 7 times earnings for many years, I would not use my investment dollars to bet on that changing.
Ford vs GM
If that’s the case, it then begs the question of whether investors should buy Ford stock or GM stock.
The latter pays out a 3.8% dividend yield and has a better (although not great) growth profile. Analysts expect GM to grow sales 0.4% this year and 0.5% next year.
Estimates call for a 2.7% drop in earnings this year before rebounding 80 basis points in 2019. However, because GM has been smashing earnings estimates, one could argue that break-even or possibly even positive earnings growth is possible this year.
Another feather in GM investors’ cap? Cruise Automation.
The automaker purchased Cruise for $581 million in cash just over two years ago. However, that purchase price jumped up closer to $1 billion when factoring in other incentives.
Still, it turned out to be a massive discount when SoftBank (OTCMKTS:SFTBY) acquired an almost 20% stake in the company for $2.25 billion in June 2018.
That values Cruise at more than $11 billion, a substantial sum considering what GM paid for it just two years ago. Further, GM owns a majority stake in this now $11.5 billion enterprise.
Following SoftBank’s investment, GM stock ran from $37 to $45 over the course of several trading sessions. It has since fallen to about $39 and worked off most of those gains.
Still, investors buying in now see a clear path to the company’s goal of introducing an autonomous taxi service in 2019. They also see the value of GM Cruise and its potential in a spinoff, IPO or other value-accretive move from management.
Trading Ford Stock
I’m personally in the camp that I’d buy GM over Ford stock at this point. But what do the charts say?
With Ford, we generally prefer the long-term weekly charts. After the latest breakdown though, we’re sticking to the short-term charts. We can see that Ford has fallen below trend-line support and was unable to stay about $12.
We now have to see if Ford stock will slow its fall near $10 and if so, whether that level will again hold up as support.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.