Using Ratios To Identify Stocks Set To Outperform Their Peers: Automobile Rankings

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Includes: F, FCAU, GM, HYMLF, TSLA
by: Stock Scrutiny
Summary

Introducing the automobile industry to my research project.

Included are the stocks' rankings in debt, profitability, efficiency, and growth categories.

Weighting of each category is presented, as well as adjusting of scores based on buyback rates.

Intro

This article implements some of the major automobile players into my research. Any new readers that wish to see a detailed explanation on how I arrive at these results, please see my introductory article that elaborates on my process. As a quick summary, I believe that over the long run, stocks that rank higher than their competitors financially (according to my assortment of ratios) will outperform stocks that have a lower ranking in that same industry. Ratios have their shortcomings, but if utilized properly, they can be helpful in analyzing a company's current financial position.

Included in this analysis are Ford (F), Fiat Chrysler (FCAU), General Motors (GM), Hyundai Motor (OTCPK:HYMLF), and Tesla (TSLA) - pricing data is gathered from Nasdaq, while scores were calculated using financial statements from E-Trade.

Ratio Research

Debt

Company Name Total Debt/ Total Equity Quick Ratio Current Ratio Defense Interval Current Liquidity Ratio EBIT/Interest Expense
Ford Motor 429.2% 1.08 1.20 90.1 1,497.2 2.55
Fiat Chrysler Automobiles 58.8% 0.59 0.82 50.2 1,225.8 5.57
General Motors 270.1% 0.80 0.92 84.3 1,276.3 7.46
Hyundai Motor 107.8% 1.26 1.48 120.0 2,194.6 7.92
Tesla 280.9% 0.52 0.83 81.3 1,063.8 -0.35

Current Debt Scores

1. Hyundai- 1.83

2. General Motors- 2.83

3. Ford- 3.17

4. Fiat Chrysler- 3.33

5. Tesla- 3.83

Profitability

EBIT Margin Gross Margin Net Margin Return on Assets Net Income per Employee Effective Tax Rate
Ford Motor 2.0% 14.2% 2.3% 1.4% 18,477.4 15.0
Fiat Chrysler Automobiles 4.7% 13.9% 3.0% 3.4% 16,736.8 20.1
General Motors 3.3% 14.9% 5.5% 3.7% 46,728.3 5.5
Hyundai Motor 2.5% 15.8% 1.6% 0.8% 12,339 35.0
Tesla -1.2% 18.8% -4.5% -3.3% -19,994.9 21

Current Profitability Scores

1. General Motors- 1.5

2. Fiat Chrysler- 2.67

3. Ford- 3

4. Hyundai- 3.67

5. Tesla- 4.17

Efficiency

Sales per Employee Return on Equity Capital Expenditure Ratio Employee Cost Per Unit of Revenue Total Asset Turnover Return on Invested Capital
Ford Motor 0.81 10.4% 20.6 0.07 0.62 2.7%
Fiat Chrysler Automobiles 0.66 14.6% 20.5 0.2 1.14 10.2%
General Motors 0.85 21.9% 5.8 0.06 0.67 7.5%
Hyundai Motor 0.79 2.2% 19.9 0.2 0.54 1.3%
Tesla 0.44 -21.3% 9.3 0.13 0.74 -6.2%

Current Efficiency Scores

1. General Motors- 2.17

2. Fiat Chrysler- 2.33

3. Ford Motor- 2.5

4. Hyundai- 3.83

5. Tesla- 4

Growth

Free Cash Flow Growth Revenue Growth Total Debt Growth EPS Growth Change in Working Capital Growth
Ford Motor -19.4 7.2 16.1 -50.0 25
Fiat Chrysler Automobiles 388.8 -0.2 -47.7 954.3 77.8
General Motors 9.7 -3.5 66.3 -5.6 -42.8
Hyundai Motor -50 5.3 12.9 -76.3 28.9
Tesla 89.7 430.4 377.0 17.4

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Current Growth Scores

1. Fiat Chrysler- 1.8

2. Tesla- 2.2

3. Ford- 3.4

4. Hyundai- 3.6

5. General Motors- 4

Weighting

After implementing performance-based weighting to each category, I have determined that the profitability ratios are most correlated to price performance, followed by efficiency, debt, and growth. Therefore, instead of the equation for finding the cumulative score of a stock looking like this:

(Debt Score x .25) + (Profitability Score x .25) + (Efficiency Score x .25) + (Growth Score x .25) = Final Score

... it now looks like this:

(Debt Score x .26) + (Profitability Score x .28) + (Efficiency Score x .28) + (Growth Score x .18) = Final Score

With this weighting, more value is given to categories with the greatest correlation to price performance, which, in turn, should lead to more accurate final scores. To answer any lingering questions about how I determine weighting, please see my article that introduces the concept. Here are the most recent weight-adjusted scores for the automobile industry:

1. General Motors- 2.48

2. Fiat Chrysler- 2.59

3. Ford- 2.98

4. Hyundai- 3.22

5. Tesla- 3.68

Adjusting for Share Buybacks

In my most recent article, I introduced how share repurchases can influence share price, and thus, why my future analyses will attempt to account for companies' strategies in this area. For more details on how I determine these upcoming weights, please see the article that explains its implementation. In short, I standardize each company's rate of common shares outstanding reduction to have an effect of between -.1 and .1, with the stock that retires the greatest percentage of its shares to receive the .1 improvement in its score and so on. Here is a table showing the data:

Share Repurchase Rate Effect on Score
Ford Motor -0.6 0.008148148
Fiat Chrysler Automobiles -1.5 0.021481481
General Motors 6.7 -0.1
Hyundai Motor 1.3 -0.02
Tesla -6.8 0.1

Complete Scores

1. General Motors- 2.38

2. Fiat Chrysler- 2.61

3. Ford- 2.98

4. Hyundai- 3.20

5. Tesla- 3.78

General Motors finished in first place - with its debt, profitability, and efficiency scores more than offsetting the troubles it saw in the growth section. The company's score was improved even more once buybacks were accounted for, as its share count declined by the highest percentage. Another solid performer was Fiat Chrysler, which only finished a little bit behind GM. Similar to General Motors, the stock only had one category it was below average in when compared to the rest of the companies in the analysis. In this case, it was debt that burdened their score the most, with the rest of the three categories going quite smoothly.

Seeing volatile scores across the analysis was Ford, which ended up right in the middle of all possible scores. This was enough to earn it third place, and according to my research, was one of the most efficient automobile companies, yet also one of the slower growing. Its share repurchase rate was also in the middle of the pack, leading to no affect on its final score when adjustments were made.

Rounding out the bottom of the list was Hyundai and Tesla. Hyundai seemed to be in a really strong debt situation relative to its peers, but lagged behind in the rest of the categories. Most notably, its profitability score only barely surpassed Tesla with a 3.83. Tesla, unsurprisingly, was one of the fastest growing automobile firms, bringing in a score of 2.4 for that part of my research. Not much else can be said about the rest, however, as Tesla finished in last place in the rest of the categories. Adding on to the woes Tesla saw was that they had the lowest buyback rate, again hurting their score after taking this into account.

Conclusion

Ratios certainly aren't the be all and end all, but I'm a firm believer this type of strategy can serve as a useful supplement for investors conducting a holistic analysis. I also want readers to keep in mind that these scores I calculated simply serve as a starting point. What I really want to see is how these final scores progress over time, so for those of you who believe these placements aren't accurate representations of how a particular company is doing, just remember that their score could have been improving or declining over the last couple of years (I just haven't calculated it).

As always, feel free to leave comments and feedback below, and don't be afraid to shoot me a follow if you want to see how adding more industries and analyzing the data I gather progress throughout the year.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.