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What happened
Shares of automotive giant General Motors ( GM -0.22% ) stock jumped in Monday afternoon trading, up 2.5% as of 2 p.m. ET.
You can probably thank Wall Street for that.
Image source: Getty Images.
So what
In back-to-back ratings moves, first Goldman Sachs praised General Motors stock as a better investment than Ford Motor Company ( F -0.19% ) on Friday; then this morning, as trading started up for the new week, French bank Exane BNP Paribas initiated coverage of General Motors stock — with an outperform (i.e., buy).
There’s not a lot of detail available yet on why Paribas endorsed GM stock, however, so for now let’s focus on the Goldman endorsement. As StreetInsider.com reports, Goldman is expecting first-quarter earnings to be “difficult” for automakers this year, with the supply chain issues that have been dogging the industry for the past year and more now exacerbated by COVID-19-related shutdowns in China, and raw materials and parts supplies being disrupted by the conflict in Ukraine.
The good news, though, is that much of this risk may be priced into automotive stocks, which have issued “generally conservative” forecasts for 2022. Relevant to Goldman’s expressed preference for GM over Ford, though, it’s worth pointing out that over the past 52 weeks, while GM stock is down 34%, Ford is actually up 22%.
Now what
That being said, I’m not sure I agree with Goldman’s argument that this makes GM a better bargain than Ford. Consider: Even after rising 22% in price over the past year, Ford stock still sells for only 3.7 times trailing earnings — versus GM which sells for a 6.4 P/E ratio.
Don’t get me wrong. Both stocks look cheap, but Ford still looks cheaper than GM to me. Additionally, according to data from S&P Global Market Intelligence, most analysts forecast a faster return to earnings growth for Ford than for GM, predicting that Ford’s earnings will grow 10% in 2023, versus GM’s earnings, which are expected to flatline. Similarly, looking three years out, analysts have Ford earning 22% more in 2025 than it will earn this year. By that time, GM will probably be growing again, too — but still earning only 13% more in 2025 than it does in 2022.
Long story short, while both Ford and GM sport enticingly cheap P/E ratios today, Ford seems to have the better growth prospects, making it a better choice for long-term investors.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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