Investing in the automobile sector can be extremely tricky as companies part of this sector experience high capital expenditures and cyclical revenue. As a result, most automobile companies have underperformed indices such as the S&P 500 in the last two decades.
However, the accelerated shift toward clean energy solutions makes legacy auto manufacturers such as Ford Motor (F) and General Motors (GM) top long-term bets right now. The two companies are eyeing the rapidly expanding electric vehicle segment and are poised to benefit from multiple secular tailwinds going forward.
Let’s see which automobile giant, between Ford and General Motors, is currently a better investment.
Ford
After adjusting for dividends, Ford stock has returned just below 100% to investors in the last 10-years. However, 40% of these gains have been derived since April 2021, and for good reason. The auto heavyweight disclosed plans to gain traction in the electric vehicle segment. It has two key business segments and Ford’s Model e division is focused on EV manufacturing.
In fact, Ford expects to manufacture two million electric vehicles each year by 2026, accounting for a third of its global volume. The company also forecasts EV sales to account for 50% of total shipments by 2030.
Ford will soon begin deliveries of the F-150 Lightning which is its much anticipated electric pick-up truck. The basic version of the EV offers a driving range of 230 miles on a single charge while other versions can increase the battery capacity to 320 miles.
Ford also invested $500 million in EV start-up Rivian for a 12% stake which is currently worth close to $5 billion. Rivian is backed by Amazon as well and has pre-orders for 100,000 delivery vans from the tech behemoth.
General Motors
Similar to Ford, even General Motors is investing heavily to build its EV infrastructure. General Motors has in fact claimed it will plow in $35 billion in the autonomous-vehicle and battery research verticals through 2025. These investments are expected to provide General Motors with two battery-manufacturing facilities by the end of 2023.
General Motors expects to manufacture and ship one million EVs in North America by 2025 and introduce 30 new EV models over the next few years.
Investors should also note that pre-orders for GM’s Silverado EV have already surpassed 110,000 in a two-week period. The company enjoys a sizable presence in China which is the world’s largest EV market. In the last two years, GM has sold close to six million vehicles in China and these numbers should move higher once electric vehicle adoption increases.
The verdict
Both Ford and General Motors continue to trade at attractive valuations. For instance, Ford is forecast to increase sales by 15% to $145 billion in 2022 and by 10.3% to $160 billion in 2023. Comparatively, its adjusted earnings are forecast to increase at an annual rate of 74% in the next five years. So, Ford stock is valued at a forward price to sales multiple of 0.5x and a price to earnings ratio of 8.5x, which is extremely cheap.
Alternatively, General Motors is forecast to increase sales by 23% to $156 billion this year and by 6.4% to $166.4 billion in 2023. Its price to sales multiple is 0.42x and its price to earnings ratio is also attractive at 6.3x while its adjusted earnings are forecast to rise at an annual rate of 15% in the next five years.
Both Ford and GM are undervalued gems that are targeting the high-margin trucks and SUV segment in the EV vertical. However, Ford’s investment in Rivian and robust earnings growth make it a better stock today.
F shares were trading at $16.07 per share on Tuesday morning, down $0.59 (-3.54%). Year-to-date, F has declined -22.23%, versus a -4.02% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditya Raghunath
Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist.
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