Electrify Your Portfolio With These Three Automotive Stocks
This week, we use AAII’s A+ Investor Stock Grades to provide insight into three automotive stocks. With the push toward electrification, should you consider these three auto and truck manufacturing stocks of Ford Motor Co., General Motors Co. and Tesla Inc.?
Auto & Truck Manufacturing Stocks Recent News
The automotive industry is facing a lot of change. During the initial pandemic lockdowns, the automotive industry was hit hard as global supply chains ground to a halt, manufacturers and dealers temporarily closed and people stayed home and drove less.
The availability and adoption of advanced technology solutions is driving a majority of the underlying trends in the auto industry. Electrification of cars is leading the charge. Sales of electric vehicles (EVs) doubled in 2021 from the previous year to a new record of 6.6 million.
The support for electric vehicles is undeniable. In August, U.S. Congress passed a climate and energy bill that included a tax credit for electric vehicle buyers up to $7,500. Previously, Tesla and General Motors did not qualify for electric vehicle benefits because they had sold more than 200,000 all-electric or hybrid plug-in cars. This legislation changes that.
Ford’s presence in the electric vehicle space has increased notably. The company plans to invest over $50 billion in electric vehicles through 2026 and hopes to produce 600,000 electric vehicles by 2023. Despite this, Tesla still dominates the U.S. electric vehicle market. In 2021, Tesla vehicles accounted for 70% of new electric vehicles registered.
Overall, auto and truck manufacturers face a crucial decade. Making the transition to electric powered vehicles could make or break companies. New competitors such as Rivian Automotive Inc. (RIVN) continue to enter the market. Additionally, managing a changing supply chain environment could prove difficult and will continue to be essential for success.
Grading Auto & Truck Manufacturing Stocks With AAII’s A+ Stock Grades
When analyzing a company, it is helpful to have an objective framework that allows you to compare companies in the same way. This is why AAII created the A+ Stock Grades, which evaluate companies across five factors that have been indicated by research and real-world investment results to identify market-beating stocks in the long run: value, growth, momentum, earnings estimate revisions (and surprises) and quality.
Using AAII’s A+ Stock Grades, the following table summarizes the attractiveness of three auto and truck manufacturing stocks — Ford, General Motors and Tesla — based on their fundamentals.
AAII’s A+ Stock Grade Summary for Three Auto & Truck Manufacturing Stocks
What the A+ Stock Grades Reveal
Ford Motor Co. (F) is an automobile company. The company designs, manufactures, markets and services a full line of electrified passenger and commercial vehicles, such as Ford trucks, utility vehicles, vans and cars and Lincoln luxury vehicles. The company’s segments include automotive, mobility and Ford Credit. The automotive segment develops, manufactures, distributes and services the vehicles, parts and accessories of Ford and Lincoln vehicles. The mobility segment primarily includes the development of Ford’s autonomous vehicles and related businesses, Ford’s equity ownership in Argo AI (a developer of autonomous driving systems) and other mobility businesses and investments. The Ford Credit segment comprises the Ford Credit business on a consolidated basis, which is primarily vehicle-related financing and leasing activities. Ford Credit offers a range of automotive financing products to and through automotive dealers throughout the world.
Ford has a Momentum Grade of B, based on its Momentum Score of 63. This means that it is above average in terms of its weighted relative strength over the last four quarters. This score is derived from an above-average relative price strength of 0.1% in the most recent quarter and 49.8% in the fourth-most-recent quarter, offset by a below-average relative price strength of negative 12.9% in the second-most-recent quarter and negative 29.9% in the third-most-recent quarter. The scores are 54, 33, 13 and 99 sequentially from the most recent quarter. The weighted four-quarter relative price strength is 1.4%, which translates to a score of 63. The weighted four-quarter relative strength rank is the relative price change for each of the past four quarters, with the most recent quarterly price change given a weight of 40% and each of the three previous quarters given a weighting of 20%.
A higher-quality stock possesses traits associated with upside potential and reduced downside risk. Backtesting of the Quality Grade shows that stocks with higher grades, on average, outperformed stocks with lower grades over the period from 1998 through 2019.
Ford has a Quality Grade of B with a score of 64. The A+ Quality Grade is the percentile rank of the average of the percentile ranks of return on assets (ROA), return on invested capital (ROIC), gross profit to assets, buyback yield, change in total liabilities to assets, accruals to assets, Z double prime bankruptcy risk (Z) score and F-Score. The F-Score is a number between zero and nine that assesses the strength of a company’s financial position. It considers the profitability, leverage, liquidity and operating efficiency of a company. The score is variable, meaning it can consider all eight measures or, should any of the eight measures not be valid, the valid remaining measures. To be assigned a Quality Score, though, stocks must have a valid (non-null) measure and corresponding ranking for at least four of the eight quality measures.
The company ranks strongly in terms of its change in total liabilities to assets, F-Score and return on assets. Ford has a change in total liabilities to assets of negative 5.0%, an F-Score of 7 and a return on assets of 4.6%. The sector median change in total liabilities to assets and F-Score are 2.4% and 4, respectively. However, Ford ranks poorly in terms of its return on invested capital and gross income to assets, in the 27th and 21st percentile, respectively.
The company has a Value Grade of A, based on its Value Score of 87, which is in the deep value range. This is derived from a very low price-to-sales (P/S) ratio of 0.32 and price-earnings (P/E) ratio of 4.1, which rank in the 12th and eighth percentile, respectively. Ford has a Growth Grade of C based on a score of 51. The company has strong annual cash from operations over the last five years but poor five-year annual sales growth.
General Motors Co. (GM) designs, builds and sells trucks, crossovers, cars and automobile parts and provides software-enabled services and subscriptions worldwide. The company provides automotive financing services through its GM Financial segment. GM North America and GM International develop, manufacture and/or market vehicles under the Buick, Cadillac, Chevrolet and GMC brands. The cruise segment is engaged in the development and commercialization of autonomous vehicle technology. It offers OnStar and connected services to approximately 22 million connected vehicles globally through subscription-based and complimentary services. It is also developing hydrogen fuel cell applications across transportation and industries, including mobile power generation, class seven and eight trucks, locomotive, aerospace and marine applications.
The company has a Value Grade of A, based on its Value Score of 86, which is considered to be deep value. Higher scores indicate a more attractive stock for value investors and, thus, a better grade.
General Motors’ Value Score ranking is based on several traditional valuation metrics. The company has a rank of 19 for price-to-book-value (P/B) ratio, 14 for the price-to-sales ratio and 16 for the price-earnings ratio (with the higher the rank being better for value). The company has a price-to-book ratio of 0.77, a price-to-sales ratio of 0.37 and a price-earnings ratio of 6.4. The ratio of enterprise value to earnings before interest, taxes, depreciation and amortization (EBITDA) is 7.3, which translates to a rank of 36.
The Value Grade is based on the percentile rank of the average of the percentile ranks of the valuation metrics mentioned above, along with the price-to-free-cash-flow (P/FCF) ratio and shareholder yield. The rank is scaled to assign higher scores to stocks with the most attractive valuations and lower scores to stocks with the least attractive valuations.
Earnings estimate revisions offer an indication of how analysts view the short-term prospects of a firm. For example, General Motors has an Earnings Estimate Revisions Grade of C, which is neutral. The grade is based on the statistical significance of its latest two quarterly earnings surprises and the percentage change in its consensus estimate for the current fiscal year over the past month and past three months.
General Motors reported a negative earnings surprise for second-quarter 2022 of –4.8%, and in the prior quarter, reported a positive earnings surprise of 25.1%. Over the last month, the consensus earnings estimate for the third quarter of 2022 has decreased from $1.957 to $1.893 per share due to one upward and four downward revisions. Over the last three months, the consensus earnings estimate for full-year 2022 has increased 0.2% from $6.787 to $6.801 per share due to one upward and six downward revisions.
General Motors has a Quality Grade of C with a score of 56. The company ranks strongly in terms of its return on assets and F-Score. The company has a return on assets of 3.1% and an F-Score of 6. The industry average return on assets is just below General Motors’ at 2.9%. The company ranks below the industry median for accruals to assets, return on invested capital and gross income to assets.
Tesla Inc. (TSLA) designs, develops, manufactures, sells and leases fully electric vehicles, energy generation and storage systems, and offers services related to its products. The company’s automotive segment includes the design, development, manufacturing, sales and leasing of electric vehicles as well as sales of automotive regulatory credits. Additionally, the automotive segment also comprises services and other sales of used vehicles (which includes non-warranty after-sales vehicle services), retail merchandise, sales by its acquired subsidiaries to third-party customers and vehicle insurance. Its energy generation and storage segment includes the design, manufacture, installation, sales and leasing of solar energy generation and energy storage products, related services and sales of solar energy systems incentives. Its automotive products include Model 3, Model Y, Model S and Model X. Powerwall and Megapack are its lithium-ion battery energy storage products.
Tesla has a Quality Grade of A with a score of 84. The company ranks strongly in terms of its return on assets, Z-Score and F-Score. Tesla has a return on assets of 15.0%, a Z-Score of 6.69 and an F-Score of 7. The company ranks above the industry median for all quality metrics except buyback yield.
Tesla has a Momentum Grade of C, based on its Momentum Score of 55. This means that it is average in terms of its weighted relative strength over the last four quarters. This score is derived from a relative price strength of –3.8% in the most recent quarter, –18.9% in the second-most-recent quarter, 1.2% in the third-most-recent quarter and 19.0% in the fourth-most-recent quarter. The scores are 47, 26, 54 and 96 sequentially from the most recent quarter. The weighted four-quarter relative price strength is –1.2%, which translates to a score of 55.
Tesla reported a positive earnings surprise for second-quarter 2022 of 25.1%, and in the prior quarter reported a positive earnings surprise of 42.5%. Over the last month, the consensus earnings estimate for the third quarter of 2022 has decreased from $1.040 to $0.998 per share due to five upward and 11 downward revisions. Over the last month, the consensus earnings estimate for full-year 2022 has increased 1.2% from $4.045 to $4.094 per share, based on six upward and 10 downward revisions.
The company has a Value Grade of F, based on its Value Score of 1, which is ultra expensive. This is derived from a very high price-earnings ratio of 79.0, a high price-to-sales ratio of 10.16 and a price-to-book ratio of 18.76, which rank in the 95th, 89th and 97th percentile, respectively. Tesla has a Growth Grade of B based on a score of 76. The company has had strong year-over-year sales increases over the last five years.
The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.
If you want an edge throughout this market volatility, become an AAII member.