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Tesla vs. Ford: Which Stock Is a Better Buy?

Zacks Equity Research

Shares of Tesla, Inc. TSLA rose 7.3% on Apr 3 to close at $298.52, while that of Ford Motor Company F fell 1.7% to close at $11.44. While price change generally holds significance in itself, a major impact of this change was Tesla’s upgradation to the second largest automaker in the U.S. by market capitalization.

Yesterday’s closing price increased Tesla’s market cap to $48.63 billion while that of Ford fell to $45.47 billion. General Motors Company GM maintained its number one spot with a market cap of $51.19 billion.

Tesla’s share price rose on the preliminary deliveries of first-quarter 2017. The company reported record quarterly deliveries of over 25,000 vehicles, up 69% year over year, indicating its likelihood of achieving the target of 50,000 vehicles in the first half of 2017.

Meanwhile, Ford reported U.S. sales of 236,250 units in March, a 7.2% year over year decline. The company’s U.S. sales, as of Apr 3, also declined 4.4% year over year.

The Background

Ford was established almost 114 years ago and has been making mass market vehicles for a large part of its history. The company sells millions of cars each year, has revenues in billions and has been profitable every year post the financial crisis.

The company generated revenues of $151.8 billion, sold over 2.61 million vehicles and recorded $4.6 billion profit in 2016. It is also focused on enhancing shareholder returns. In first-quarter 2017, the company declared a $200 million supplemental cash dividend, equivalent to 5 cents per share, in addition to its regular quarterly dividend of 15 cents.

On the other hand, Tesla is roughly 14 years old and is about to commence the production of its first mass market vehicle, the Model 3. The company is highly unprofitable, deeply indebted and burning cash at a high rate. In 2016, the company generated revenues of $7 billion, sold roughly 76,000 vehicles and remained a loss-making company. Moreover, the company raised further capital of over $1 billion recently.

Price Performance

However, Tesla has clearly outperformed Ford over the past one year. During this period, Tesla’s shares rallied 20.9% while Ford saw a 10.6% decline.

What’s Driving Tesla Faster than Ford?

While Ford has been a stable company in the long term, Tesla seems to be the favorable choice for investors lately. The electric car maker has been rapidly expanding its operations, with recent proliferation in the Middle East, and plans to make Model 3 available in many new markets, including India, Brazil, South Africa, New Zealand, Singapore and Ireland. The company has also received a vote of confidence in China, with one of the country’s largest tech company, Tencent Holdings, revealing its 5% stake in Tesla.

The company also aims to ramp up its production to 500,000 units by 2018, although the possibility seems unlikely. Moreover, it is rapidly developing a network of Superchargers with a faster battery-pack charging ability compared to normal electric charging stations to support its vehicles.

Meanwhile, Ford discontinued its operations in Japan and Indonesia in 2016 and is facing sluggish demand in South America. The company’s future in Europe is also uncertain as its major operations are based in the U.K., which has voted in favor of Brexit. The future of the company depends significantly on trade agreements negotiated with other EU nations.

As a result, Ford expects headwinds of $400–$500 million in 2017 and 2018 due to Brexit. It also expects first-quarter adjusted earnings per share in the range of 30–35 cents, lower than the 68 cents reported in the prior-year quarter. The low expectations are attributable to increased costs, lower volumes as well as unfavorable currency translations. In addition, the company’s adjusted pre-tax profits and adjusted earnings per share are expected to decline in 2017 from 2016 levels.

Let's take a look at how Tesla, a Zacks Rank #3 (Hold) and Ford, a Zacks Rank #5 (Strong Sell), are stacked up against each other in terms of certain key metrics.

Estimate Revisions

Over the past month, Tesla’s current year estimates have narrowed by around 1.5% to a loss of $2.69 per share. On the other hand, Ford’s estimates for earnings for the current year decreased 3.7% over the same period to $1.58.

EPS & Sales Growth

Tesla’s EPS and sales have been growing substantially while that of Ford has been declining. In fourth-quarter 2016, as compared to fourth-quarter 2015, Tesla saw EPS and sales growth of 3.1% and 88.1%, respectively, while Ford saw declines of 48.3% and 5%, respectively.

Long-Term Growth Expectations

In terms of long-term growth expectations, Tesla scores way above Ford. The expected growth rate for Tesla for the next 3–5 years is 30% compared with an expected growth of 8.2% for Ford.

Leverage

Tesla has a lower leverage as evident by its debt to equity ratio of 1.06, compared with Ford’s debt to equity ratio of 3.20.

In Conclusion

Going by the above arguments, it can safely be said that Tesla stands out as a better investment proposition compared to Ford. With a solid Zacks Rank, positive estimate revisions, better outlook and strong growth prospects, the scale is clearly tilted in favor of Tesla.

Another stock investors can consider within the auto sector is Renault SA RNLSY. The company carries a Zacks Rank #1 (Strong Buy).You can see the complete list of today’s Zacks #1 Rank stocks here.

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