When General Motors (GM 0.26%) reported his huge earnings beat last week – sales were up 56% year over year, profits were up 39% and a whopping $4.6 billion in free cash flow (FCF) – it seemed to set the stage for a day of equally good news from Ford Motor Company (F 0.22%)which would report earnings a day later.
That’s not quite how things happened.
Ford in numbers
Reporting profits late Wednesday, Ford’s numbers weren’t entirely horrible – they just weren’t as good as GM’s. Sales of $39.4 billion were up 10% year over year and Ford generated a respectable free cash flow of $3.6 billion.
But unlike GM’s rise in FCF, Ford’s FCF number decreases 54%. Ford also reported a net loss for the quarter of $827 million, or $0.21 per share. Granted, Ford would have been profitable, but for a $2.7 billion non-cash impairment charge taken on its investment in autonomous driving company Argo AI, but even removing that accusation, Ford’s pro forma earnings for the quarter would have been just $0.30 per share – down 41% year over year.
Fortunately for shareholders, investors were in a lenient mood last week. In the end, Ford stock ended the week up 8.8% from where it started – not as good as GM stock’s 11% gain, but not too shabby. The problem is, I don’t believe Ford deserved to be up. at all on these results.
General Motors vs. Ford
Why take it against the current? Let’s explore both car manufacturers relative performance.
First and foremost, Ford’s revenue grew a lot slower than GM in the quarter — 10% growth versus 56%. Second and equally obvious, Ford’s earnings, according to generally accepted accounting principles (GAAP) and on a pro forma basis, declined as GM’s earnings rose. And sure, Ford’s GAAP loss is at least due to its ill-fated investment in Argo AI — but even without throwing that money down a hole, Ford’s adjusted operating profit margin for the quarter would have dropped significantly, from 8, 4% to just 4.6%. . GM’s operating profit margin, on the other hand, has gained a full 1 percentage point – and is now almost double that of Ford – 9.1%, according to data from S&P Global Market Intelligence.
To further illustrate the differences in the companies’ relative trajectories, as I pointed out over the weekend, “in nearly every market where GM competes, the company expanded its market share,” ultimately increasing its global market share by 80 basis points to 7.7%. By contrast, Ford’s market share remains stuck in neutral at just 4.9% – no change from a year ago.
It wasn’t all bad news for Ford
Now, that’s not to say that everything about Ford was bad news last week. Notably, the company generated substantial free cash flow during the quarter. It may not have been as much money as Ford was making a year ago, but it’s enough, as Ford has pointed out, the company has already – in the first nine months of this year alone – exceeded its free cash flow goal for the together of 2022.
As management reminded us previously, it had set a goal of generating FCF between $5.5 billion and $6.5 billion this year. But in fact, already in the third quarter, the company generated 6.6 billion dollars.
Factoring this new data into its forecast, Ford says it now expects to increase operating profits by 15% this year (to $11.5 billion) and end 2022 with between 9.5 and $10 billion cash flow positive.
Valuing Ford stocks
With a market capitalization of just over $53 billion, Ford stock is currently trading between 5.3 and 5.6 times its free cash flow projection for 2022, depending on its position in that range. Sure, Ford has its issues. Compared to GM’s performance over the last quarter, I think it’s clear that Ford isn’t performing as well as a business like his rival.
That being said, I see a lot to like about the stock Ford as stock. After all, 5.3 times (or 5.6 times) free cash flow is cheap. At current prices, I could see myself buying Ford stock just for the company’s 4.5% dividend yield. And if Ford can deliver on its promise to grow earnings by 15% through the end of the year — and continue that performance beyond 2022 — that stock really could be an investment at home.
Long story short: based on performance and price, GM and Ford stocks look like long-term winners, but Ford remains the best buy.
Rich Smith has no position in the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.
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