The Ghost Train

the ghost train by the finance ghost

Ford versus Ferrari

@ F i n a n ce G h o s t

I believe strongly in leaving room for error and avoiding hugely ex p e n s i ve stocks. Fo rd , not Tesla, was the right call this year

otorsport

Mg a i ne d in popularity in 2021 thanks to a fierce r iv a l r y between two drivers. But the biggest winner of the 2021 Formula 1 season will probably be Netflix with Drive to Survive, especially after the drama of the past weekend’s final race (in which Max Verstappen won the title ahead of Lewis Hamilton).

Over 50 years ago, Ford and Ferrari battled it out at Le Mans, as told in the excellent film Ford v Ferrari. Both those companies are listed, with Ford boasting a market cap of nearly $86bn and Ferrari over $44bn.

Ferrari sells just over 10,000 vehicles a year. Ford sold more than 4-million vehicles in 2020, and this was down on pre-pandemic years, which exceeded 6-million sales. Ferrari’s unit sales are less than 0.17% of Ford’s in a normal year, yet the Italian Stallion’s market cap is over half of Ford’s.

When it comes to investing, you must look far below what you can see on the surface. In a bull market, where everything goes up, it hardly matters what you buy. As many investors learnt the hard way this year, those days were left behind in 2020. Investors need to unpick financials and valuation multiples to see if they look reasonable.

Ford has generated $36.7bn in revenue and $7.9bn in gross profit over the past 12 months, producing a gross profit margin of 21.5%. Over the same period, Ferrari posted $4.8bn in revenue and $ 2 . 5 bn in gross profit, a gross profit margin of 52%.

Fe r r a r i ’s net profit margin has been over 20% in the past 12 months, a spectacular business model despite the company continuously disappointing the long-suffering t i fo s i with its Formula 1 efforts. Ford’s net profit margin, meanwhile, is just 2.1%. Ford must achieve almost $10m in sales to make the same profit for shareholders that Ferrari generates with $1m in sales.

As I always remind readers, valuations matter. Ferrari clearly has a far stronger business model than Ford, yet Ferrari’s share price is up 15% this year and Ford is up more than 150%. Ford trades on an EV/ebitda (enterprise value to earnings before interest, taxes, depreciation, and a mo r t i s at io n) multiple of around 22a nd Ferrari at over 33.

The market isn’t blind to the fact that $RACE is a much sexier business than $F and not just when it comes to their stock tickers. The multiples reflect this.

Comparing Ford and Ferrari products hasn’t been relevant since the GT40s took the chequered flag and embarrassed the Italians in the 1960s. The overlap in product categories is practically zero.

But this isn’t the case for Ford vs Tesla, as Ford’s Mustang Mach-E sits squarely against the Tesla offerings. These two companies offer a fascinating share price comparison.

I’ve written many times over the past year that Tesla’s share price may disappoint investors.

At the time of writing, it’s up nearly 40% year-to-date which certainly isn’ta disappointment. Importantly, this does pale in comparison with the likes of Ford (150% as mentioned).

It doesn’t do any favours for the share price that Tesla’s emperor is more volatile than Max and Lewis battling it out at the apex. When he isn’t smoking weed on podcasts or holding Twitter polls about whether to sell his shares, Elon Musk is threatening to resign.

Te s l a’s revenue over the past 12 months was nearly $47bn. Gross profit margin was 23.1%, so both those numbers are better than Ford’s. Net profit margin of 7.4% is also higher than Fo r d ’s figure.

The days of debating whether Tesla is a good business are behind us. Instead, we must focus on its valuation. Te s l a’s market cap is $1.02-trillion, or 12 times higher than Fo r d ’s. It trades on an ebitda multiple of over 140. The only way to try tomake sense of numbers like this is to consider forward vs trailing multiples. A trailing multiple compares the current share price to the earnings over the past year. A forward multiple takes an estimate of next year’s earnings and compares it to the current price.

This is how fast-growing companies can justify substantial multiples.

If I said you could pay R500 for a company that will make R400 next year, you probably won’t care about what the earnings were last year. The forward multiple is the one that matters.

Based on data provider TIKR, Tesla’s forward ebitda multiple is just under 70 and Ford’s is nearly 14.

Tesla will grow earnings much faster than Ford, but the market is already pricing that outcome into the Tesla share price.

I believe strongly in leaving room for error and avoiding hugely ex p e n s iv e stocks. I hold Ford, not Tesla, which was the right call this year.

Another good call was avoiding the Queen of Growth Cathie Wood and $ARKK, down nearly 23% year-to-date.

We don’t know what 2022 will hold. What we do know is that fundamental valuations remain all-important. x