The Ford (F -1.97%) company innovated the automated assembly line. With it, modern manufacturing was born. Today, another visionary by the name of Elon Musk is seeking to accomplish just as monumental a feat with Tesla (TSLA -5.10%): the shift from internal combustion engines to the mass use of electric cars.
Both companies have admirable histories, but which stock is the better buy for Foolish investors today?
Image Source: Getty Images.
Recent share-price performance and valuation
Tesla's shares have surged this year as the company continues to execute on its vision of a mass-market electric car: the Model 3. That has sent its shares well above $300 and its market capitalization to a whopping $53 billion. This is impressive, to say the least, especially given that the company sold just over 76,000 cars last year.
Ford shares, on the other hand, have barely budged all year. This is in spite of a price-to-earnings multiple any value investor will love: 8. And its long history of innovation and ability to produce millions upon millions of automobiles, Ford falls short of Tesla's valuation with a market capitalization of just $47.9 billion. A simple earnings-multiple comparison between the two companies isn't even possible, as Tesla loses money. To attempt to compare these two automakers, a look at price-to-sales and price-to-book ratio is required:
F Price to Book Value data by YCharts
Tesla's valuation is off the charts. And a lot has to go right for it to reward shareholders in the future.
Winner: Ford.
Dividends and financing moves
Unsurprisingly, Tesla pays no dividends. Ford has not only been paying out and steadily increasing its dividend, but also buying back shares:
F Dividend (Annual) data by YCharts
Tesla, on the other hand, continues to issue shares and debt in order to fund its enormous capital needs:
TSLA Net Debt Issuance (Quarterly) data by YCharts
Tesla's actions are unsurprising; that's what high-growth manufacturers do. The money required for what Tesla is attempting to accomplish is extraordinary (its first Gigafactory will cost an estimated $5 billion). However, it is a wild card that investors need to keep in mind. Share issuances dilute ownership, and the per-share value of a stock takes a hit.
Winner: Ford
Growth prospects and risks
This is where things get dicey. Tesla is obviously expected to grow revenue at a MUCH faster rate than Ford in the future. However, it is starting from a much smaller base. The real question for investors is how to properly handicap Tesla's growth for the obvious risks. The potential outcomes to Tesla's growth tale are about as varied as a company can have. Some investors, like billionaire Ron Baron, believe Tesla's on a path to greatness and its share price will reach $1,000 by 2020. It also dominates the white-hot electric car market:
Data Source: IEA.
Data Source: Moody's.
The total of 76,000 cars that Tesla sold last year is just a speck compared to the 6.65 million produced by Ford. Tesla habitually loses money and hopes to one day (at best), meet the gross-profit margins on a per-car basis of traditional automakers.
Elon Musk's Tesla may be the tech-savvy startup leading the way to an electric-car-driven future, but Ford is doing everything it can to become a 21st-century automaker as well. As highlighted by the Fool's own automotive expert John Rosevear, Ford's new CEO Jim Hackett was brought in to drive a focus on technological innovation. Even today, Ford has the following initiatives well underway:
- The mass production of self-driving cars by 2021.
- The production of advanced drivetrains.
- A smart-mobility subsidiary, a move echoed by General Motors.
- Plans to court and sell cars to ride-hailing services like Uber and Lyft.
Ford's moves are laudable in the face of disruption from companies like Tesla. However, the blunt truth of the matter is that even if Ford is successful, it will essentially be replacing its current business in keeping pace with an ever-changing world.
Winner: Tesla
And the winner is...
Ford. It's a tough call, and the success of Tesla may very well prove a huge negative for our winner. But there is also the possibility that Tesla will coexist with the Big 3 automakers in an America with driverless, electric cars wherever you look. Ford's valuation, yield, and admirable inroads into the mass production of the type of cars Tesla currently produces make it the better bet here.
