The auto industry has seen huge sales lately, and both Ford Motor (NYSE: F) and Fiat Chrysler Automobiles (NYSE: FCAU) have done their best to capitalize on the favorable conditions in the industry. However, the stock market is forward-looking, and investors are nervous about the potential for future declines in auto sales that could in turn send profits downward for these cyclical giants. The result has been extremely attractive-looking valuations for the automakers, but what's not clear is whether these potential value stocks are actually value traps -- and which would be a smarter pick. Let's look more closely at how Ford and Fiat Chrysler match up right now on some key metrics to see which could be the better buy.
Continue Reading Below
Valuation and stock performance
Ford Motor and Fiat Chrysler have gone in different directions over the past year. Ford is down 17% since May 2016, but Fiat Chrysler has jumped more than 50% over the same time frame.
However, despite the big run in Fiat Chrysler, its stock still carries more attractive valuations by simple earnings-based measures than Ford. When you look at trailing earnings over the past 12 months, Fiat stock trades at less than eight times those earnings, compared to a trailing multiple of almost 12 for Ford. Future profit expectations narrow the gap somewhat, but even there, Ford's forward earnings multiple of not quite seven is well above Fiat's forward P/E of just over four. Neither Ford nor Fiat Chrysler is getting any respect from the stock market, and Fiat Chrysler looks slightly more attractive even though its stock has already bounced back recently.
Image source: Fiat Chrysler Automobiles.
One area where the two automakers don't even bother competing is on the dividend front. Ford has a lucrative dividend yield of more than 5%, but Fiat Chrysler doesn't pay a dividend at all. Indeed, with the exception of one declared dividend in early 2016, Fiat Chrysler doesn't have a dividend history.
Ford has gone through a lot, and its ability to pay a dividend speaks to its commitment to shareholders. The Blue Oval suspended its payout during the financial crisis, and by doing so, it managed to avoid the bankruptcy proceedings that Chrysler and General Motors (NYSE: GM) ended up needing. By the end of 2011, Ford had decided to reinstate its dividend, and the company has increased its payout consistently in the years since.
Fiat Chrysler's decision not to pay dividend stems largely from its commitment to refocus on debt management. The company has a huge amount of debt on its balance sheet, and each year, refinancing transactions are an essential part of Fiat Chrysler's cash management. Until it better manages that debt, Fiat Chrysler is unlikely to get on the dividend bandwagon in the near future.
Growth and potential risk
From a growth perspective, with the industry having been at peak levels for a couple of years now, many are worried about the future. For Ford, the recent past has been tumultuous, with the appointment of new CEO Jim Hackett following the stock's poor performance recently. Going forward, Hackett intends to make sure that Ford executes as well as possible in its operations, making decisive moves with respect to underperforming divisions. He wants to modernize Ford in order to become more efficient and innovative in its efforts. Finally, Hackett will look at Ford's culture, making sure that it can keep up with the pace of the industry's evolution and remain able to pursue opportunities despite its large size.
Fiat Chrysler has seen solid financial performance recently, including a 4% rise in sales and a 34% jump in net profit during its most recent quarter. The company's Jeep, Alfa Romeo, and Maserati brands have seen an uptick in the number of sport utility vehicles sold, and low gasoline prices in the U.S. have definitely helped to fuel greater demand for larger cars and trucks. The European market has been Fiat Chrysler's strength lately, with double-digit percentage gains in sales standing in stark contrast to the 6% drop in vehicles sold in North America during the period.
At this point, Fiat Chrysler looks like the better buy than Ford, because Fiat Chrysler has a more attractive valuation and stronger growth momentum than the Blue Oval at this point. In the long run, both companies will have opportunities to prove their mettle, but they're likely to have to go through a cyclical downdraft in the auto industry first before they get to the finish line.
10 stocks we like better than FordWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Ford wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of May 1, 2017