hey YouTube I'm Jimmy in this video I'm gonna walk through my analysis of the US
auto industry I'm gonna touch on four different companies Ford General Motors
Fiat Chrysler and then I'm gonna put tesla are in there even though test is a
little bit different so the questions were trying to answer our which of these
auto companies are the best investment and where would they fit in our
portfolio so the entire auto industry is huge and complex and I could easily drag
this video on for hours talking about things like autonomous vehicles
emissions requirements hybrid cars versus electric cars batteries the
different regulations coming down that you know helping or hurting Tesla
pricing of vehicles things like that but for this video I'm mostly gonna stick
with the numbers and we're gonna try to see what story the numbers are telling
us and trying to determine whether or not we think that these companies are
good investments and how we could try to profit from them now I believe that the
auto industry is largely about margins and I'm sure you probably remember this
but when the economy goes bad well the auto industry tends to do quite
terrible and like they did back in 2008 and frankly I think that this has a lot
to do with their margins and it also has to do with the fact that the auto
industry tends to be very cyclical meaning that when the economy slows the
revenue of the auto industry tends to slow as well
so here's revenue for the industry going back to 2008 now we can see that Ford
goes all the way back to 2008 Tesla's also showing the early signs of revenue
going back to 2008 GM pops up in 2009 and fiat-chrysler pops up in 2013 even
though all these company existed all of these companies existed in 2008 well
with the bailouts and mergers and all the different things that happened with
each of the companies this is where their revenue starts so I kept it this
way just to try to make them more comparable based on the way those
businesses are structured today so I have to look closer at each company's
numbers we'll look to see where the opportunities are so let's start with
Ford when we eliminate all the other companies we could see this is a chart
of Ford's revenue now since the Great Recession in 2009 we can see that
they've been growing mostly they've had a few pull backs here and there but
nothing too major when we add gross profits well we can see that it's
somewhat flat it's somewhat small in fact in 2017
gross profit margins for Ford were just 10% and this gets to one of the real
issues of the entire auto industry because although Ford has one of the
lowest gross profit margins from our group while the whole industry isn't
that good to put this in perspective coke in 2017 had gross profit margins of
63% another funny example is General Electric or GE has gross profit margins
of the very same 10% and you may have seen some news that they've gotten
destroyed over the past couple years now part of this isn't Ford's fault the
reality is that it's a nature of the business making cars is a very
capital-intensive business meaning that they need to build factories they need
to buy raw materials they need to maintain all of the factories that they
have they need to pay all the employees of the machines or whatever they're
doing but it's very expensive and then when they go to sell their product well
the competitor next to them is doing everything they can to discount their
products as much as possible so you end up with you end up with very small
profit margins so now when we add net income we could see that their net
income looks very similar to gross profit although Ford's net income
margins in 2017 was just 4% okay now let's look at the other companies and
see how they compare here's a chart of GM's revenue and we can see that GM
hasn't done all that much either now when we put up gross profits we could
see the gross profit margins are actually improving recently in fact in
2017 GM had gross profit margins of 21% when we compare that to Ford's 10% they
look fantastic well when it comes to net income net
income didn't do quite as well in fact their margins came in at about 7% for
2017 now jumping over to fiat-chrysler we could see that their revenue began
climbing in 2013 and 2014 and then that was after they merged both Fiat and
Chrysler merged in 2014 and then after that revenues stalled out a bit now when
we add gross profits we could see the gross profits are okay they came in
about 15% when we add net income we could see that net income has been doing
decent in the past couple years but net income margins only came in at about 4%
which was about what Ford did okay now on to Tesla and test is a whole
different beast because they're doing such different things than
the other companies so we look at Tesla's revenue we can see that Tesla's
revenue looks fantastic in fact revenue almost tripled in two years from 2015 to
2017 and that's that's amazing now when we add gross profits we could see their
gross profits seem to be growing as well now Tesla's gross profit margins came in
about 23% in 2017 that's the best of all the four companies that we're looking at
then when we switch to net income we could see that net income has been
consistently going the other way now this is a bit unusual because generally
if revenue rises and gross profits rise well net income should rises as well it
certainly shouldn't go in the other direction so I dug into their financials
to see what I could find as to why this happened and it turns out that Tesla
added expenses in a few different categories first they had more interest
expense their interest expense came about because they took on more debt now
remember when we said that revenue tripled from about five billion to 12
billion well their long-term debt more than quadrupled over that very same time
period coming from about two billion to more than nine billion from 2015 to 2017
then Tesla also increased their selling and general administrative expenses or
SGA and they also increased their research and development
now R&D I'm actually okay with because of what Tesla does they're a bit
different they're trying to figure out how to make a better car so them having
a huge R&D expense makes a lot of sense so I'm personally ok with that
from an invest ability standpoint so now the question is how investable is the
auto industry so how about we start with forward p/e so fords forward p/e comes
in at about 6 x GM comes in at about 5.5 x Fiat has a forward p/e of about 4 X and
then Tesla has a forward p/e coming in in about 40 X now don't forget Tesla
hasn't been profitable up to this point so they wouldn't have a trailing p/e so
in order for them to have a forward p/e that implies that at least some analysts
believe that tesla is going to make a profit going out the next 12 months now
Tesla is actually an anomaly here because Tesla is more trading on what we'll call
the disruption factor and many investors are banking
the fact that tesla is going to change the industries and in many ways they
probably already have but from a valuation perspective it's not really
fair to compare these the real question for us with Tesla is that we if we were
to invest in Tesla what we're banking on is that they're
going to turn profitable and they're going to clean up some of the issues
that they've had over the past year or so so how should we value Tesla well p/e
doesn't really work because they don't have a history of profits so we have
nothing real to compare it to we could try using enterprise value to EBITDA
and currently their forward enterprise value to EBITDA is about 15 X when
we compare that to the one year average well they have an average of about 28 X
now I'm not sure we should be trading at the 28 X because so many things have
shifted for them but I could easily make a case for 20 X now here's what Tesla's
chart looks like and we could see that they've been all over the place over
this past year and at the end of the day they didn't really move much at all so
if we were to apply a 20x we'd end up at about the $365 level now if I were to
add this to my portfolio well I would have to be ready for some crazy
volatility look at the price swings with this thing and I'm afraid that if they
don't pull off what they're promising then the stock may tank just because of
it but if they do pull it off it has the potential to really swing higher because
people love what they're trying to do okay now let's jump back to Ford now out
of the big three US auto manufacturers Ford has the highest p/e ratio although
they do have a dividend yield of more than 7.5% now their dividend has been
fairly flat lately and they have thrown in some special dividends
so if dividends of what we're after then Ford could be a pretty good play
I mean 7.5% is a fantastic dividend yield when you consider that
the S&P 500 is closer to 2% hopefully they're able to improve their margins by
2020 which will help for me will help claim the fear that if the economy goes
gets in trouble Ford would get in a lot of trouble ok now let's look at GM now GM
has a p/e ratio of about 5.5 X and we also saw that GM has pretty decent
margins GM also has a dividend yield of about 4.5% so that's
pretty good it's not quite as good as Ford Ford's is
but it's still decent they also have a better margins which in theory implies
that they have a larger safety net than ford does so what about Fiat Chrysler
well their PE is the lowest of the group at about 4X now currently Fiat
Chrysler doesn't pay a dividend so they have no dividend yield analysts are
expecting for both their revenue and profits to creep along slowly over the
next couple years but for me there just isn't too much exciting about Fiat and I
think that they seem to be deserving of the lowest p/e of the group so where do
we think each of these companies belong in our portfolio personally I think Fiat
doesn't belong anywhere if we would add Tesla well if Tesla does go ahead and
shift the industry and they do pull off what they're trying to do I think that
it could be an enormous upside even if it would be way overvalued but I think
that you would get an incredible pop in the stock but I think if it's gonna be
in our portfolio needs to be in the portfolio as a speculative play because
it's possible that they trip and they stumble like they did in this past year
and you end up with the stock that goes nowhere and that could be dangerous or
you could even end up with a stock that collapses if for some reason things
aren't able to get in line for them now if we buy Ford
clearly we're doing it for the dividend and any sort of recession that may hit
well that could really hurt them the dividend we probably make us feel a
little bit better about it so for me I think that Ford could be a good position
in a dividend portfolio preferably a small position just incase the economy
does continue to struggle or struggling against worse then with
General Motors well I think adding GM could be good because it has a decent
dividend yield it has a bit more stability than Ford so I would actually
want to add that to our dividend portfolio as well probably on top of the
ford position so it would be Ford let's say at whatever percentage and then I
would make the GM position even bigger because I think GM has a bit more
stability although its dividend yield is a little bit lower but what do you think
would you add any of these companies to your portfolio let me know what you
think in the comments below and if you haven't done so already hit the
subscribe button if you if you found this video to be informative hit the
thumbs up and thank you for sticking with me all the way into the video and
I'll see in the next video thanks
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