Background: Ford Motor Company (NYSE:F) produces cars, trucks, and components for both. Ford trades an average of 37 million shares per day with a market cap of $68 Billion.
Wall Street isn't expecting much this quarter. Earnings per share are expected to come in below last year for the same quarter. The earnings release is scheduled before the market opens on July 24, 2014.
The mean estimate is currently 37 cents a share, a decline of 8 cents (17.8%) from 45 cents during the corresponding period last year. The lowest analyst estimate this report is 31 cents per share, and the highest is 43 cents per share.
The whisper numbers I've read range from 38 cents to a high of 45 cents. That means, Ford will have to generate a significant beat and guide higher in order to impress the market.
Compared to Ford's 9.3 forward price-to-earnings ratio, Tesla (NASDAQ:TSLA) is at 70.74, GM (NYSE:GM) rolls in at 8.1, and Toyota (NYSE:TM) is 9.5. Of these major automakers, I like Ford the best as an investment. For full disclosure, I drive a GM SUV and my wife drives a Toyota. My wife likes her Toyota and will probably get another one (first one was a birthday gift from me).
Last on my list is Tesla. In fact, I recommended shorting Tesla call options in my newsletter. I think Tesla makes a cool car and if I lived in California, I would probably buy one. Unfortunately, I live in Wisconsin. My neighbor has one, but he also has a four-wheel drive vehicle for when it snows (it does that a lot here).
In past articles describing the perils of buying Tesla stock, it's common for me to receive comments along the lines of "don't bet against Musk" and "electric cars are the future." But here is the thing, calling Tesla a short candidate isn't a bet against Musk, I think the man is brilliant and will succeed in growing Tesla. It's a bet against shareholders who don't understand the math involved with investing in automakers.
Operationally, Tesla isn't profitable and has yet to deliver one-quarter in the black. Federal and state tax credits are creating an illusion of profit for Tesla, but there are a limited number of Federal tax credits Tesla (or any company) can receive, and California tax credits may become more difficult to obtain soon for a whole host of reasons.
Toyota has the top two bestselling EV cars, followed by Ford with its Fusion Hybrid. Where's Tesla? Well, it has captured about .1% (one-tenth of one percent) or less of the auto market. Great car? Yes, but it's a small niche market with relatively small margins.
However, Tesla's market cap is $27 billion compared to Ford's $70 billion and GM's $60 billion. Toyota's market cap is the largest of this group at $188 billion. Remember my previous comments about operational profitability? Ford drove home almost a billion dollars in profit in just the last quarter alone.
Tesla, on the other hand lost $50 million (the largest loss in the last four quarters) and may not reach profitability for years. To gain an 8% market share, Tesla has to grow about 85 times its current size, but that doesn't necessarily mean the company will generate a profit. However, if Tesla can expand into lower retail priced cars, and I think it's a fair statement to assume the company can, the profit/margins will probably be less per car than gas cars.
Which leads us back to what Tesla is worth if expected revenue grows at a modest pace with little, or no profits? I suggest based on a P/E multiple of 25 and profit per share of $6, the stock has an upside of $150.
Keep in mind that in order for Tesla to reach more than a 4% or 5% market share, the Federal tax credit will have reached its full allotment. Without tax credits making Tesla more affordable for most U.S. buyers, sales will soften. In the meantime, Ford, GM and Toyota will continue to make headway into the EV space.
Ford didn't take a bailout when the other automakers received their government bailouts, and that's how the free market is supposed to work. It's no wonder GM continues to be hobbled long after considering it ran its operations as if it's above repercussions.
While Ford's stock volatility is below GM and Tesla, at 1.34 Beta, the shares trade with significantly more variance than the overall market.
Beta is a measurement of volatility, with 1 representing the market average. Above 1 indicates the stock on average has been relatively more volatile, and below 1 demonstrates greater stability than the average of the market.
Ford's high Beta is mitigated by its above average dividend yield of 2.8%. The company has the profits to maintain the dividend also.
Analysts approve the direction Ford is headed in. 11 of the 18 analysts covering the company give a buy recommendation, and the average Ford price target is $19.13.
Traders and investors are expecting a 66 cent change higher or lower, or about a 4% change during the next 9 days. Investors need to plan on the shares trading down to $16.88, or as high as $18.2 while remaining within a single standard deviation percentage.
From Ford's closing price before last quarter's results, until the time of writing, the shares increased a humble 7.5%, or $1.22. The close before the announcement was $16.32, and currently about $15.78 as of this writing.
Regardless of the change in price, investors can capture the time premium between now and after the earnings release by selling call options while also protecting your portfolio. Simply buy back any calls and or puts sold after the report. If the shares jump higher, what you lose in stock appreciation is likely more than made up through the expected fall in implied volatility after the report.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.