Ford Motor Company (NYSE:F) shares are down more than -7.21% this year and recently increased 0.53% or $0.06 to settle at $11.46. PulteGroup, Inc. (NYSE:PHM), on the other hand, is down -11.04% year to date as of 05/17/2018. It currently trades at $29.58 and has returned -4.73% during the past week.
Ford Motor Company (NYSE:F) and PulteGroup, Inc. (NYSE:PHM) are the two most active stocks in the Auto Manufacturers – Major industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.Growth
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect F to grow earnings at a 2.05% annual rate over the next 5 years. Comparatively, PHM is expected to grow at a 43.26% annual rate. All else equal, PHM’s higher growth rate would imply a greater potential for capital appreciation.Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this., compared to an EBITDA margin of 12.04% for PulteGroup, Inc. (PHM). F’s ROI is 2.00% while PHM has a ROI of 8.20%. The interpretation is that PHM’s business generates a higher return on investment than F’s.Cash Flow
The value of a stock is simply the present value of its future free cash flows. F’s free cash flow (“FCF”) per share for the trailing twelve months was +0.16. Comparatively, PHM’s free cash flow per share was +0.44. On a percent-of-sales basis, F’s free cash flow was 0.41% while PHM converted 1.47% of its revenues into cash flow. This means that, for a given level of sales, PHM is able to generate more free cash flow for investors.Liquidity and Financial Risk
F’s debt-to-equity ratio is 4.35 versus a D/E of 0.78 for PHM. F is therefore the more solvent of the two companies, and has lower financial risk.
F trades at a forward P/E of 7.47, a P/B of 1.25, and a P/S of 0.28, compared to a forward P/E of 7.97, a P/B of 1.98, and a P/S of 0.93 for PHM. F is the cheaper of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. F is currently priced at a -7.36% to its one-year price target of 12.37. Comparatively, PHM is -17.42% relative to its price target of 35.82. This suggests that PHM is the better investment over the next year.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. F has a beta of 1.00 and PHM’s beta is 1.03. F’s shares are therefore the less volatile of the two stocks.Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. F has a short ratio of 0.00 compared to a short interest of 4.14 for PHM. This implies that the market is currently less bearish on the outlook for F.Summary
PulteGroup, Inc. (NYSE:PHM) beats Ford Motor Company (NYSE:F) on a total of 8 of the 14 factors compared between the two stocks. PHM higher liquidity, is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, F is the cheaper of the two stocks on an earnings, book value and sales basis, PHM is more undervalued relative to its price target. Finally, NESR has better sentiment signals based on short interest.