- Ford and GM are trading at historically low Price/Earnings multiples.
- Both Ford and GM are also trading at a tiny fraction of their sales.
- GM has the stronger balance sheet of the two and is a great play in this volatile market.
Both are trading at insanely low multiples to earnings and revenues. Ford's Price/Earnings multiple is below 7, and its $51 billion market cap is supported nearly $150 billion in sales. GM is even safer. Its P/E is 5 and its $47 billion market cap is supported by $152 billion in sales.
Thanks to these low, low prices both stocks offer handsome yields. Ford's dividend yield is 4.83%, and its net income covered the dividend 5 times over in the last quarter. The yield on GM is 5.17%, and it covered the dividend by over 10 times in the last quarter.
So which one is best? The answer depends on how you expect the industry’s future to unfold.
Ford has bet that it can control the process by which technology companies enter the fray by playing companies off against one another. It is still discussing a deal with Alphabet Inc-A (NASDAQ:GOOGL), the artist formerly known as Google, to make self-driving cars (early reports had it that the deal was signed and delivered at the Consumer Electronics Show). However Ford is also working with Amazon, and it has its own open source system called Smart Device Link, being adopted by competitors like Toyota Motor Corp (NYSE:TM), that gives the industry its own play in the technology.
GM, on the other hand, is looking beyond the rise of autonomy, betting that autonomy will turn cars from products into a service, and has put $500 million into Lyft, a ride-hailing/sharing service, as a way to control that future.
The market, meanwhile, has been betting that these elephants are too old to tap dance. Tesla (NASDAQ:TSLA), whose production capacity is measured in the thousands (against millions for GM and Ford), is now worth $25 billion, half what its larger rivals are. It’s as though a flea were being priced as an elephant.
The Tesla pricing is based on a quote from Gandhi “First they ignore you, then they ridicule you, then they fight you, then you win.” But that quote is about politics, not business. Incumbent car companies have plenty of time to respond to the challenge of autonomy, and appear alert to it.
Still, you don’t buy these stocks for capital gains. That era ended with the financial crisis. Auto bulls once believed that it was the GM bailout that was keeping investors out, but they are now past caring. You buy these stocks strictly for yield, for the dividend. GM is paying you 36 cents/share each quarter to own their stock, Ford 15 cents. Both those figures could be raised later this year, because both companies are earning far more than what they are paying out. That means if you get in now your yield is going to rise. It’s a pay-out well-covered by profits.
As to which one to get into, Ford has over half its assets subject to debt today, while GM has debt on less than one-third its assets. That, and the higher yield, makes GM the play.