GM Vs. Ford: Who Can Brave The Sluggish Auto Market Better?

After setting sales records for two consecutive years, the auto industry is looking at a relatively slower year. Nearly 18 million vehicles were sold over both 2015 and 2016, a feat which is unlikely to be repeated in 2017.

Previously, a combination of factors was driving the market higher. These include the likes of cheap fuel prices, easy credit, new models and an improving labor market. But the trend seems to be undergoing a reversal at the moment. As a whole, auto sales have declined on a year-over-year basis for five months in a row.

The last such decline, in May, has heightened concerns that the first annual slide in terms of sales in eight years is in the offing. It is widely believed that the reason for this reversal of fortunes is automakers’ unwillingness to pursue the approach they had adopted in the past. Instead of extending further incentives — a practice which was prevalent previously in order to hold up sales — automakers are focusing on profitability.

Stocks Under Consideration

In this context, it is important to determine which of the two traditional auto majors, Ford Motor Company (F – Free Report) and General Motors Company (GM – Free Report) are better placed at the moment. Both stocks carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Other auto stocks from the Zacks Automotive – Domestic industry which also carry a Zacks Rank #3 include Harley-Davidson, Inc. (HOG – Free Report) and PACCAR Inc. (PCAR – Free Report) .

Price Performance

The Zacks Automotive – Domestic industry has tasted success over the last one year, gaining 25.6% in the process. GM has underperformed the industry with a gain of 19.6% over this period. This is why it is stronger in terms of price performance since Ford has lost 13.4% over the same period.

Valuation

Since the auto sector is capital intensive, the most appropriate ratio to value companies is EV/EBITDA. Additionally, it is the ideal metric to compare two companies within the same industry. Further, it is not impacted by differing capital structures and excludes the impact of non-cash expenses.