- In my view, at this moment Ford stock is a better investment than Tesla stock.
- Considering its compelling valuation metrics, Ford stock is significantly undervalued.
- While I do believe that TSLA's stock still has room to grow, investment in this fast-growing company is riskier.
People interested in investing in automakers' stock might find themselves in a dilemma, should they choose a deep value stock like Ford (NYSE:F), or a high growth auto stock like Tesla (NSDQ:TSLA)? This doubt is a specific case in the much broader dilemma os which is a better stock picking strategy, value or growth? Let us first compare the two stocks on value and growth parameters.
Ford stock is significantly undervalued. Ford's trailing P/E is very low at 5.53, and its forward P/E is also very low at 6.70. The price to free cash flow ratio is extremely low at 4.84, and the PEG ratio is very low at 0.62. In contrast, Tesla has a negative trailing P/E, and its forward P/E is very high at about 130. Moreover, its price to sales ratio is very high at 7.20, and its price to book value is also very high at 12.37.
Tesla has recorded substantial sales growth in the last few years. The company's average annual sales growth over the past five years was extremely high at 103%, compared to Ford's average annual sales growth of 3% over the same period. Although Tesla's EPS growth was negative in the last five years, its average annual estimated EPS growth for the next five years is very high at 35%. In comparison, Ford's estimated EPS growth for the next five years is about 9%.
Value versus Growth
Concerning the dilemma, which is a better stock picking strategy, value or growth? I have gathered historical results for the two strategies. The table below shows the average annual total return of three ETFs over the last year, the last three years, five years, ten years, and fifteen years. The three ETFs represent the market (iShares Russell 1000 ETF), value stocks (iShares Russell 1000 Value ETF), and growth stocks (iShares Russell 1000 Growth ETF). Only over the last ten years period, there was a significant difference between the three ETFs. The average annual return of the growth ETF has been 9.14%, while the average return of the value strategy has been 5.91%, and that of the market was around 7.62%. In all other periods, the three ETFs have given pretty similar results.
As I see it, although the ten years average return of the Russell 1000 Growth ETF has been 55% higher than that of the Russell 1000 Value ETF, we cannot conclude that growth strategy is superior to value strategy, since the results in the other periods have been pretty similar.
Although Ford has recorded a tepid growth in the last few years, it could achieve significant growth in the next few years. On August 16, Ford announced its intent to have a high-volume, fully autonomous vehicle in commercial operation by 2021. According to the company, it is investing in or collaborating with four startups to enhance its autonomous vehicle development, doubling its Silicon Valley team and more than doubling its Palo Alto campus.
CEO Mark Fields explained:
“The next decade will be defined by automation of the automobile, and we see autonomous vehicles as having as significant an impact on society as Ford’s moving assembly line did 100 years ago. We’re dedicated to putting on the road an autonomous vehicle that can improve safety and solve social and environmental challenges for millions of people – not just those who can afford luxury vehicles.”
According to Boston Consulting Group, vehicles that drive themselves on the freeway or take over in traffic jams may be on the road in large numbers by 2017 and autonomous cars might create a $42 billion market for the technology by 2025. Ford is not the only company developing an autonomous vehicle, General Motors (NYSE:GM), Apple (NSDQ:AAPL), Alphabet (NSDQ:GOOGL), and TSLA are also developing autonomous vehicles. However, Ford is the only company to commit launching an autonomous car as early as 2021. In my view, being the first to launch autonomous vehicles will give Ford a significant advantage over its competitors. Hence, we can expect higher sales and earnings growth for the company.
Since the beginning of the year, Ford stock is down 12.1% while the S&P 500 Index has increased 6.1%, and the Nasdaq Composite Index has gained 4.2%. Moreover, since the beginning of 2012, Ford stock has gained only 15.1% In this period, the S&P 500 Index has increased 72.5%, and the Nasdaq Composite Index has risen 100.3%. According to TipRanks, the average target price of the top analysts is at $14.75, an upside of 19.1% from its August 26 close price. However, in my opinion, shares could go much higher.
Since the beginning of the year, Tesla stock price is down 8.3%. However, since the beginning of 2012, TSLA stock has gained an astounding 670%. According to TipRanks, the average target price of the top analysts is at $267, an upside of 21.4% from its August 26 close price, which appears reasonable, in my opinion.
Although top analysts are giving TSLA stock a higher upside potential, in my view, at this moment, Ford stock is a better investment. Ford stock is significantly undervalued. Ford's trailing P/E is very low at 5.53, the price to free cash flow ratio is extremely low at 4.84, and the PEG ratio is very low at 0.62. What's more, Ford is paying a generous dividend currently yielding 4.88%, and the company is poised to achieve a significant growth with the autonomous vehicle project. While I do believe that TSLA's stock still has room to grow, investment in this fast-growing company is riskier.