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Tesla Is Disrupting American Car Manufacturers

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In the age of Tesla, are you better off investing in Ford or General Motors?

When you think of the largest vehicle manufacturers by value and sales, Ford and General Motors typically come to mind. However, Tesla is disrupting the car industry with its sustainable, forward-thinking approach. After Tesla turned its previous quarterly losses into profits that exceeded analysts’ expectations (along with Tencent’s 5% stake in Tesla), the firm’s financial sustainability is no longer in question.

The question is how Ford and GM will contend with an up-and-coming car company that has no signs of slowing down. What made Tesla the most valuable car company also left Ford and General Motors in its rearview mirror. Ford and GM lack the luxury, alternative energy models that Tesla boasts. When Tesla introduced the Model 3, it tapped into a large, environmentally-friendly market.

With record breaking sales in May for its F-series trucks, lower incentive spending YoY, Ford must be doing something right so far. However, expectations for rentals and sales typically wade in the second half of the year, so its May sales and rental growth wouldn’t be enough to sway expectations for better sales for 2017 entirely. YTD, Ford is down 2% on sales, and analysts expect minimal upside potential for the foreseeable future.

In addition, the underlying financials are largely disappointing. Ford’s one year asset growth is at its lowest level for 1Q 2017 in the past 5 years. Return on capital has been held down to near 7-year lows. Sluggish sales and troubling financial growth may keep Ford’s stock price bounded, but its prospects for future success may keep investors in the game.

Ford replaced its CEO Mark Fields, who only spent 3 years as chief executive, with Jim Hackett, who previously headed Ford Smart Mobility. This shows a changing attitude towards sustainable transportation and a more innovative outlook for what Ford plans to create in the future. Rather than improving margins and selling features of its most popular line, the Ford F-series trucks, the overhaul of a new CEO is a pivot in the direction of a conglomerate that is looking to market and produce battery-powered vehicles.

Much like Tesla, Ford has now released a number of hybrid and electric vehicles. Ford’s new fleet targets a market looking for reasonably-priced, efficient vehicles. It is still too early to tell if changing Ford’s CEO was the right move. In doing so, it sent a message that Ford is looking to become the brand of the future.

General Motors has faced constant adversity in its fight to become the greatest car manufacturing conglomerate. Strong sales of the Ford F-150 have overshadowed the Chevy Silverado, especially since new ads hit consumers recently. Chevy’s direct ads attacking Ford have gone on to reduce the Silverado’s market share, and slipped even further down the ladder of the market for trucks, behind Fiat Chrysler’s Ram. As if things couldn’t get worse, on June 9th, Lundin Law PC announced a securities Class Action Lawsuit against GM alleging violations of federal securities laws from February 27, 2012. The lawsuit comes after the unveiling of a defective device aimed to cheat emissions tests, and that GM’s had misled the public in statements.

From its underlying financial data, GM is troubling for other reasons. For one, its quick ratio is 0.7, due to the monumental outstanding liabilities that have held GM accountable for their malfeasance. GM’s asset turnover ratio, which determines a company’s ability to generate revenue from its assets, is 0.78. The most discouraging statistic to value investors looking for blue chip stocks with strong dividend payouts for sustainable portfolio growth is its 75.2% retention ratio, which measures its reinvestment of net income into growing the business, rather than paying out dividends.

With an inability to generate strong sales and income from its assets, whilst also retaining so much of its income towards reinvestment, it seems that GM hasn’t been able to turn churn the money wheel as strong as its competitors have. Analysts predict stagnant earnings per share into the next few quarters. In the most recent past, GM has refrained from bold, innovative business decisions and fails to leverage the opportunity of an environmentally-friendly fleet.

GM however, has one of the industry’s highest operating margins, and quarterly earnings that slowly growing. Without innovative and bold risk-taking, it is hard to imagine that GM will post strong sales and revenue in the future. Instead, it seems to be in the headlines for its corporate wrongdoing, and as checks are written to alleviate liabilities, they can’t write dividend checks to shareholders.

The auto industry should see some major overhaul in the coming years as autonomous driving and sustainability alternative energy vehicles hits the shelves. Today however, companies are facing litigation and sluggish sales as gasoline prices rebound from the 2016 energy crisis. Although these stocks could be deemed “temporarily unpopular”, and ripe for value investment, it seems too far-fetched a bet that Ford and GM can revolutionize the already matured auto-manufacturing market that fits a growing pace for clean air and alternative energy vehicles.

Aaron Choi is a student at New York University's Stern School of Business.

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