Introduction: Industry Identification and Reasons
The automotive industry is arguably one of the exciting sectors in the U.S. market currently facing stiff competition, with all players trying their level best to outsmart each other in terms of branding, expanding their operations to new territories, improving their management strategies, hiring qualified staff, as well as creating new products. This is one of the reasons that explain the choice of this sector. Besides, the automobile industry is expanding annually with the increasing purchasing power of Americans. More people can now afford cars in the U.S. than ever before, and the variety is terrific. One of the primary reasons why the automobile industry is fascinating is the rise of smart cars, with consumers increasingly preferring modern electric vehicles to the traditional petroleum-powered automobiles. Whereas this presents an opportunity for Tesla and other smart automobile companies, it is a threat to General Motors and other oil-powered car manufacturers, which are now slowly transitioning to green car production.
Partly, this is influenced by the rising global need to reduce the emission of chlorofluorocarbons (CFCs) that is slowly destroying the ozone layer and the entire environment. Of particular interest is the rise in the market share of smart companies like Tesla, even though the traditional ones like General Motors and Ford Motor Company are still performing well with figures sales increasing annually. The industry, though, is indubitably shifting with future consumers predicted to prefer smart cars, also because petroleum deposits will soon recede in the Arab nations. Therefore, the primary objective of this paper is to decide which automotive company between General Motors, Ford Motor Company, and Tesla is best positioned to offer the most shareholder value in the future. The decision is primarily based on the financial analysis and assessment of the capital structure of the three giant automobile firms based on their financial statements obtained at each fiscal year ends. The ratio analysis includes a five-year trend analysis and a competitive assessment (using profitability, liquidity, debt, and return on equity), growth projections (using balance sheets and pro forma income statements) for the coming year. The capital structure ranges from the cost of capital, CAPM, cash flow, the value of common stock, and MVA. The three companies were selected based on their market valuation.
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Discussion: Analysis of Competing Firms
General Motors
General Motors is a renowned American car manufacturer with its headquarters in Detroit, Michigan. The firm produces, sells, and distributes cars and vehicle parts as well as financial services. In 2017, under the stewardship of Mary T. Barra, the firm generated more than 9,600,000 units. Subsidiary firms include Chevrolet, Cadillac, GMC, Opel, and many others.
A 5-year trend analysis
The balance sheet of General Motors (see General Motors Balanced Sheet) shows an upward and promising trend. For the fiscal year ending 2018, General Motors recorded a net income of $8.08 billion with revenues amounting $147.05 billion, which is lower than the $155.92 billion obtained in 2014 (NASDAQ, 2019). The company has seen a decrease in total current assets from $ 83.67 billion in 2014 to $ 75.29 billion in 2018. The Long-term assets have also improved from $ 177.68 billion in 2014 to $ 227.34 billion. Current liabilities and stockholder equity have similarly surged from $177.68 billion to $ 227.339 billion. This is predicted to improve in the next year as well (MarketWatch, 2019a).
Competitive Analysis
Presently, based on the MarketWatch (2019a) statistics, General Motors’ profitability, liquidity, debt, and return on investment (ROI) ratios are exceptional. The firm is seemingly performing well, with a gross margin of 14.89, operating margin of 3.32, a pretax margin of 5.81, and a net margin of 5.5. Similarly, General Motors enjoys a return on assets (ROA) OF 3.68, return on equity (ROI) of 21.89, return on total capital of 3.51, as well as return on invested capital of 7.55.
General Motors Company has also recorded some of the best liquidity figures for the past five years. The current ratio now stands at 0.92, while the quick and cash ratios remain at 0.8 and 0.35 respectively. As regards debts of the company, General Motors has a total debt-to-equity (D/E) of 270.07, total debt-to-capital (D/C) of 72.98, a total debt-to-assets (D/A) of 46.14. On the other hand, the long-term D/E and D/C are approximately 188.01 and 50.8 (MarketWatch, 2019a).
Growth Projections
The revenue of the company is expected to grow for the next five years by 98 percent, while the net income is also projected to improve by 125 percent.
Capital Structure
As of 2019, the price to cash flow ratio for General Motors stood at 3.14 with an enterprise value of $136.7 billion and a market capitalization of 54.45 billion. The company has an EV-to-sales of 0.89 and EV-to-EBITDA of 7.25. On the other hand, the price-to-book ratio and the price-to-sales ratio are approximated at 1.21 and 0.33. Lastly, the D/EV (debt-to-enterprise value) is 0.82 (Yahoo Finance, 2019a).
Ford Motor Company
Ford Motor Company is one of the few multinational American companies with high market valuations globally. With its head offices in Dearborn, Michigan, the company manufactures and sells luxury Ford cars and spare parts. Some of the firm’s subsidiaries include Troller Veiculos Especiais, Lincoln Motor Company, and many others (Ford, n.d.).
A 5-year trend analysis
Looking at the balance sheet of Ford Motor Company, there is no doubt that the firm has experienced an unsteady trend for the past five years. In 2018, the company registered a slightly higher net income of $3.68 billion than it recorded in 2014 ($1.23 billion). However, all these numbers are much lower than what was registered in 2015 ($7.43 billion), 2016 ($4.6 billion), and 2017 ($ 7.6 billion). The revenues also display a similar trend with the company recording only $14.61 billion in 2018, which is slightly lower than the $29.23 billion received in 2015 (MarketWatch, 2019b).
Competitive Analysis
As of 2018, Ford Motor Company has registered promising profitability, liquidity, debt, and return on investment (ROI) ratios. The company is presently performing quite well and recovering from last year’s slump. The gross margin currently stands at 9.11, the operating margin at 2.00, the pretax margin at 2.71, and the net margin of 2.79. The other profitability parameters are also improving, with the return on assets (ROA) glued at 1.43, the return on equity (ROI) placed at 10.38, the return on total capital positioned at 1.69, and return on invested capital sited on 7.55.
The iconic car manufacturer has also registered promising liquidity results in the financial year 2018. The current ratio presently stands at 1.19. The quick ratio (1.07) and cash ratio (0.36) have also indicated signs of improvement from last year. The capital structure statistics are also indicative of better things to come. For example, the total debt-to-equity (D/E) is now at 4.27.51, while the total debt-to-capital (D/C) and the total debt-to-assets (D/A) are in future poised to eclipse the current 81.04 and 59.88 respectively. Similarly, the long-term D/E (278.64) and D/C (52.82) are also expected to get better (MarketWatch, 2019b).
Growth Projections
Based on the five-year growth trend, the revenue of Ford Motors Company and net income are expected to grow by 102 percent and 124 percent respectively.
Valuation and Capital Structures
The valuation of Ford Motor Company has also significantly increased in 2018 and 2019. Presently, the price-to-cash-flow ratio for the company stands at 2.07, with an enterprise value of $154.45 billion and a market capitalization of 33.14 billion (Yahoo Finance, 2019b). The company has an EV-to-sales of 0.95 and EV-to-EBITDA of 14.28. On the other hand, the price-to-book ratio and the price-to-sales ratio are approximated at 0.87 and 0.19. Finally, the D/EV (debt-to-enterprise value) is 1.02 (Yahoo Finance, 2019b).
Tesla Motors, Inc.
Tesla Motors, Inc. is one of the most ambitious automobile firms majoring in electric cars. With its production unit and headquarters situated in Palo Alto, California, Tesla has explicitly ventured to revolutionize the automotive industry by creating, with its co-founder and current chief executive planning to increase its productivity in the next few years (Sherman, 2018).
A 5-year trend analysis
Contrary to the two companies above, Tesla Motor has experienced exponential growth in the past five years, perhaps because of the increasing customer preference to purchase clean cars. For the financial year ending 2018, Tesla recorded a record net income of $976.09 million with revenues totaling $21.05 billion. Even though this is a decrease from the previous year’s $1.96 billion, which was the highest the company has ever recorded, it is still an improvement from 2014 ($294.04 million), 2015 ($888.66 million), and 2016 (674.91 million). Even though the firm presently sells cars mainly in the U.S., as of 2018 Tesla has total assets worth $29.26 billion, which is a jump from $8.068 billion in 2014. The total assets have been increasing with an average of 4.1 percent annually for the past five years. Current liabilities have also surged to $9.775 (Macrotrends, n.d.).
Competitive Analysis
Drawing on the MarketWatch (2019c) data, Tesla is an organization on the uptrend with profitability, liquidity, debt, and return on investment (ROI) ratios getting better in the last two years. However, these ratios cannot be compared with General Motors or Ford Motor Company. Tesla is currently trying to rebuild, with a gross margin of 18.83, operating margin of -1.18, a pretax margin of -4.68, and a net margin of -4.55. The ROA (-3.34), ROE (-21.31), return on total capital (-1.40), and return on invested capital (-6.57) are also worrying.
The capital structure of the firm is, however, better compared to the rest. The current ratio presently stands at 0.83, while the quick and cash ratios are an impressive 0.52 and 0.39 respectively. Based on the debts of the firm, Tesla has a total debt-to-equity (D/E) of 234.16, total debt-to-capital (D/C) of 70.86, a total debt-to-assets (D/A) of 40.25. Also, the long-term D/E and D/C are a remarkable 191.01 and 55.66 (MarketWatch, 2019c).
Growth Projections
Tesla has faced myriad challenges in the past five years, even though the future is bright. The company expects its annual revenue to increase by 146 percent by 2022 (in the next five years). However, Tesla is projected to make a net loss of 144 percent within the same period.
Capital Structure
As of 2019, the price-to-cash flow ratio for Tesla stands at 2.64 with an enterprise value of $62.27 billion and a market capitalization of 53.72 billion. The company has an EV-to-sales of 2.84 and EV-to-EBITDA of 2.84. Besides, the price-to-sales ratio and the D/EV (debt-to-enterprise value) are roughly 2.64 and 0.18 respectively.
Conclusion
In summary, it can be deduced that General Motors Company is the best automobile industry to invest because of the high anticipated revenues (an increase of 98 percent) and net income (upsurge of 125 percent) within the next five years. Investing in Tesla is very risky because the firm is projected to make a net loss of 144 percent from its current $1.7911 billion. General Motors is also the best choice for stakeholders because of its high profitability ratios. The ROA 1.43, the ROI of 10.38, the return on total capital of 1.69, and return on invested capital sited of 7.55, implying that the risk of investing is very low. Tesla’s negative profitability margins, including a ROA of -3.34, an ROE of -21.31), a return on total capital of -1.40, and return on invested capital of -6.57, is very worrying and highly dangerous for investors.
References
Ford. (n.d.). Designing smart vehicles for a smart world . Retrieved from https://corporate.ford.com/company.html
Macrotrends. (n.d.). Tesla total current liabilities 2009-2018 . Retrieved from https://www.macrotrends.net/stocks/charts/TSLA/tesla/total-current-liabilities
MarketWatch. (2019a). Annual Financials for General Motors Co. Retrieved from https://www.marketwatch.com/investing/stock/gm/financials/balance-sheet
MarketWatch. (2019b). Ford Motor Co. Retrieved from https://www.marketwatch.com/investing/stock/f/financials
MarketWatch. (2019c). Tesla Inc. Retrieved from https://www.marketwatch.com/investing/stock/tsla/financials
NASDAQ. (2019). GM company financials: Balance Sheet . Retrieved from https://www.nasdaq.com/symbol/gm/financials?query=balance-sheet
Sherman, N. (2018, Oct 25). Tesla delivers ‘historic’ $311 m profit. BBC News, https://www.bbc.com/news/business-45971786
Yahoo Finance. (2019a). General Motors Company (GM). Retrieved from https://finance.yahoo.com/quote/GM/key-statistics/
Yahoo Finance. (2019b). Ford Motor Company (F). Retrieved from https://finance.yahoo.com/quote/F/key-statistics?ltr=1
