It’s an odd match-up in automaker Ford Motor Company (NYSE:F) vs. agribusiness giant Monsanto Company (NYSE:MON). One is an economically sensitive manufacturer, the other a defensive seller of seeds and herbicides to the world’s farmers.
If we’re going with a basketball analogy, Ford would be the Los Angeles Lakers of the Shaq and Kobe era — flashy and fun to watch when they’re winning but inconsistent and downright frustrating at times. Monsanto would be the San Antonia Spurs of the 2000s and 2010s — boring but ruthlessly efficient.
Yes, I realize this is March Madness and the proper analogies would be college teams. But I’m a lifelong Lakers fan, and I wanted to insert a Lakers reference.
Deal with it.
Ford (F)
As I eluded, Ford is an erratic stock and wildly sensitive to swings in the economy. When the economy is bad, auto sales tank. It’s really that simple.
Furthermore, Ford and the rest of its automaker peers are, in a way, victims of their own success. Competition among automakers has massively improved the quality of cars and trucks to the point that drivers can keep their cars for far longer than was practical in decades past. The average age of a car on American roads is 11.4 years. Again, that’s the current age of the average age, not the expected lifespan. Half the cars on the road are older than 11.4 years and many significantly older.
But this is also a reason why I am bullish on auto stocks. Americans have been postponing new auto purchases for years due to the lingering effects of the financial crisis, making do with an older car or sharing a car with their spouse. But at some point, your car wears out. Or you have that one last dead battery in the parking lot after work that convinces you that the old jalopy needs to go.
Let’s take a look at Ford. At first glance, Ford stock looks mildly pricey at 19.8 times trailing earnings. But remember, Ford’s earnings are highly cyclical, and looking at only a single year of data can be very misleading. Using the cyclically-adjusted price/earnings ratio (“CAPE”) or the current price divided by the average of the past ten years of earnings, we get a much more reasonable valuation of 8.4.
To put that in perspective, the lowest CAPE on record for Ford was 7.3. So, at today’s prices, Ford is trading not too far from its all-time valuation lows.
Meanwhile, Ford has lately emerged as one of the highest-yielding stocks in the S&P 500 with a dividend yield of 3.8%. After a long hiatus, Ford reinstated its dividend in 2012 and has since tripled it from $0.05 per quarter to $0.15.
I’m not wildly excited about economic prospects right now. I don’t believe that the economy has reached the “escape velocity” at which it can grow without monetary stimulus from the Fed. But I do expect it to remain stable for at least another year, which should be good news for Ford.
Monsanto (MON)
Let’s jump over to Monsanto now. Monsanto has been both a driver and a beneficiary of the great boom in agriculture since the early 2000s. Since 2003, Monsanto’s stock price is up an almost hard-to-believe 1,100%, nearly ten times the return of the S&P 500 over that period.
But after a run like that, Monsanto is no longer cheap. It trades for 24 times trailing earnings and at a CAPE of 31.8. Furthermore, its revenue growth has been decelerating for years. Over the past 10 years, Monsanto’s revenue growth rate clocked in at 11.2% per year. But that slips to 9.1% over the past five years and just 7.5% over the past year.
And unfortunately, Monsanto’s dividend is a little skimpy at today’s prices, yielding just 1.6%. Though giving credit where it is due, Monsanto has managed to grow its dividend at a 20.9% annual clip for the past 10 years. That’s not too shabby at all.
Our First-Round Pick: F
As a “buy-and-hold forever” stock, I’d probably have to go with Monsanto. Growing populations and rising living standards mean more demand for food and for the higher-yielding seeds that Monsanto’s scientists efficiently produce.
But over the next few years, I’m going with Ford. It’s cheaper, pays a better dividend and offers more immediate upside.
Head back to the Stock Market Madness bracket to vote for your favorite stocks and check out other previews!
Charles Lewis Sizemore, CFA, is the chief investment officer of investment firm Sizemore Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.
