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Former finance professional here: Ford is actually worth 3 times as much as Tesla, once you factor in debt. The total value of the Ford capital structure ("ente

Former finance professional here: Ford is actually worth 3 times as much as Tesla, once you factor in debt. The total value of the Ford capital structure ("enterprise value") is about 150 billion. When two companies have wildly different capital structures, you have to compare them on enterprise value, not the market cap of their equity. So while I give kudos to Tesla for building a valuable business, it still has a long way to go to catch up to Ford.

imjk 10y ago
Sorry, can you elaborate a little more on how debt factors into enterprise value? I've heard this before and don't fully understand.
- tedsanders 10y ago
  Market cap tells you the value of everything: both the business and its money (cash & debt). Enterprise value is the value of the business (the thing actually generating value) separate from the cash & debt it's holding. For example, if I have a banana stand worth $250K, but inside the banana stand is a briefcase with $245K, then the $250K is not really the value of the banana stand - it's mostly the value of the cash inside. The Enterprise value of the banana stand is only $5K. With the debt, the idea is the same but the sign is opposite. So if Ford is worth $50B while holding onto $100B of debt, that implies that the enterprise value is $150B. Comparing the valuations of Ford and Tesla without subtracting out cash and debt is like running a race without mentioning that the losing racer started a half mile behind. Though they 'lost' by one metric, they're still the faster runner.
  - tyingq 10y ago
    There's always money in the banana stand.
    - cal5k 10y ago
      Except during the sub-prime banana stand crisis.
- peterbonney 10y ago
  Sure! Think about two companies that just started up in the widget business, each raising $1 million of capital. Company A issued $1 million worth of equity. Company B issued $500,000 worth of equity and borrowed $500,000. Which company is more valuable? Obviously both are worth the same amount: each company has an "enterprise value" (the value that all investors in all securities place on the underlying enterprise) of $1,000,000. The only difference is that company A has only one class of investor, while company B has investors that own a riskier asset (the equity) and a less risky asset (the debt). But assuming the two companies are otherwise identical, an investor in company B can easily financially engineer themselves into a financial position that is identical to an investor in company A: for every dollar of company B equity they buy, they simply buy one dollar of company B debt. Owning $1 of company B equity and $1 of company B debt is identical to owning $2 of company A equity. Since the choice of equity or debt financing is (theoretically) arbitrary, when comparing two companies that have very different capital structures, like Ford (mostly debt-financed) and Tesla (mostly equity-financed) you have to control for those differences. The simplest way is the add the value of each company's net debt to the market value of their equity, which gives you the total market value of each underlying enterprise. A simple example we're all familiar with is home prices. Two neighbors might own nearly identical houses on the same block in the same town. One might have a mortgage and one might own it outright. But no matter the financial situation of the individual owners, the value of the two houses should be about the same: the value of the asset is separate from the financing of the asset.
  - robzyb 10y ago
    > Obviously both are worth the same amount: each company has an "enterprise value" (the value that all investors in all securities place on the underlying enterprise) of $1,000,000. The only difference is that company A has only one class of investor, while company B has investors that own a riskier asset (the equity) and a less risky asset (the debt). There's an important issue that you aren't taking into consideration. The value of the equity is ultimately based on the profit that remains after interest/debt has been paid. In your example, it is perfectly valid (if not MORE valid) to say that Company A is worth more than Company B. The investors in Company B figured that at the end of the day they will only be eligible for half the cash that investors in Company A will be eligible for. So they paid a lower price. You're insisting that debt is another form of investment, and depending on what you're looking at that makes sense, but when talking about 'value' it doesn't always hold true.
postmeta 10y ago
I can't help but think that # of employees and pension systems should be a bigger factor in valuations. GM and Ford have 200k+ employees each and so much legacy baggage where-as Tesla, even with Scty, only has around 40k employees. And they mostly tend to be fanatically hard workers.
- pembrook 10y ago
  Legacy costs for Ford and GM are only decreasing as they stopped giving out pensions in the 90s. As their retirees keep dying off, those expenses won't be replaced. Also, I know from experience Ford uses their ability to generate cash and borrow cheaply to give "buyouts" to large chunks of retirees at a time (ie. They offer a lump sum of $1 million dollars today instead of a pension. This almost always works out in the company's favor).
robzyb 10y ago
[edit]: Current finance professional here. > When two companies have wildly different capital structures, you have to compare them on enterprise value, not the market cap of their equity. So while I give kudos to Tesla for building a valuable business, it still has a long way to go to catch up to Ford. That is not necessarily true. Market cap and enterprise value are two equally valid ways of measuring value or worth. There are even more ways to measure value, such as DCF or value of assets. All of these have their pros and cons. In this case, my personal opinion is that market cap is a very meaningful way to measure Tesla/Ford and that it's noteworthy that Tesla has passed Ford. I think it is very meaningful because it (loosely) implies that the present value of Tesla's profits (i.e. net profit after tax) is higher than Ford's. Even on a risk-weighted basis. Or, at least, that's roughly-kinda-sorta what the market believes. I would argue that enterprise value would be more meaningful that market cap if we were talking about which company was 'bigger'. However, the interesting thing here is that Tesla has become more 'valuable' than Ford, for this definition of value.
- aerovistae 10y ago
  Current amateur here. I feel like there's only one important thing to consider when comparing Tesla and Ford as investment opportunities: is their value likely to increase? With Tesla, there's an obvious path for potential massive growth. It's not guaranteed, but the potential is obvious. With Ford, it's like any other auto manufacturer. What surprises are we expecting? What new products or innovations? Does Ford have any path, even hypothetical, to massive market share growth relative to its current position the way Tesla does? It seems clear to me that the answer is no. Even if their Bolt is a success, they're not about to dominate the market, double their sales, and double their stock. They don't have any Model 3 type event on the horizon. So all these comparisons of financial metrics on current value, to me, seem pointless. This is the only thing that should matter (along with whatever analysis you want to use to gauge whether Tesla is likely to be able to execute on its plans, which is a more complex question-- but performance so far makes it clear that they are experiencing steady and dependable growth of production and sales with clear, well-defined plans for further future growth.)
  - 10y ago

imjk 10y ago

Sorry, can you elaborate a little more on how debt factors into enterprise value? I've heard this before and don't fully understand.

tedsanders 10y ago
Market cap tells you the value of everything: both the business and its money (cash & debt). Enterprise value is the value of the business (the thing actually generating value) separate from the cash & debt it's holding. For example, if I have a banana stand worth $250K, but inside the banana stand is a briefcase with $245K, then the $250K is not really the value of the banana stand - it's mostly the value of the cash inside. The Enterprise value of the banana stand is only $5K. With the debt, the idea is the same but the sign is opposite. So if Ford is worth $50B while holding onto $100B of debt, that implies that the enterprise value is $150B. Comparing the valuations of Ford and Tesla without subtracting out cash and debt is like running a race without mentioning that the losing racer started a half mile behind. Though they 'lost' by one metric, they're still the faster runner.
- tyingq 10y ago
  There's always money in the banana stand.
  - cal5k 10y ago
    Except during the sub-prime banana stand crisis.
peterbonney 10y ago
Sure! Think about two companies that just started up in the widget business, each raising $1 million of capital. Company A issued $1 million worth of equity. Company B issued $500,000 worth of equity and borrowed $500,000. Which company is more valuable? Obviously both are worth the same amount: each company has an "enterprise value" (the value that all investors in all securities place on the underlying enterprise) of $1,000,000. The only difference is that company A has only one class of investor, while company B has investors that own a riskier asset (the equity) and a less risky asset (the debt). But assuming the two companies are otherwise identical, an investor in company B can easily financially engineer themselves into a financial position that is identical to an investor in company A: for every dollar of company B equity they buy, they simply buy one dollar of company B debt. Owning $1 of company B equity and $1 of company B debt is identical to owning $2 of company A equity. Since the choice of equity or debt financing is (theoretically) arbitrary, when comparing two companies that have very different capital structures, like Ford (mostly debt-financed) and Tesla (mostly equity-financed) you have to control for those differences. The simplest way is the add the value of each company's net debt to the market value of their equity, which gives you the total market value of each underlying enterprise. A simple example we're all familiar with is home prices. Two neighbors might own nearly identical houses on the same block in the same town. One might have a mortgage and one might own it outright. But no matter the financial situation of the individual owners, the value of the two houses should be about the same: the value of the asset is separate from the financing of the asset.
- robzyb 10y ago
  > Obviously both are worth the same amount: each company has an "enterprise value" (the value that all investors in all securities place on the underlying enterprise) of $1,000,000. The only difference is that company A has only one class of investor, while company B has investors that own a riskier asset (the equity) and a less risky asset (the debt). There's an important issue that you aren't taking into consideration. The value of the equity is ultimately based on the profit that remains after interest/debt has been paid. In your example, it is perfectly valid (if not MORE valid) to say that Company A is worth more than Company B. The investors in Company B figured that at the end of the day they will only be eligible for half the cash that investors in Company A will be eligible for. So they paid a lower price. You're insisting that debt is another form of investment, and depending on what you're looking at that makes sense, but when talking about 'value' it doesn't always hold true.

postmeta 10y ago

I can't help but think that # of employees and pension systems should be a bigger factor in valuations. GM and Ford have 200k+ employees each and so much legacy baggage where-as Tesla, even with Scty, only has around 40k employees. And they mostly tend to be fanatically hard workers.

pembrook 10y ago
Legacy costs for Ford and GM are only decreasing as they stopped giving out pensions in the 90s. As their retirees keep dying off, those expenses won't be replaced. Also, I know from experience Ford uses their ability to generate cash and borrow cheaply to give "buyouts" to large chunks of retirees at a time (ie. They offer a lump sum of $1 million dollars today instead of a pension. This almost always works out in the company's favor).

robzyb 10y ago

[edit]: Current finance professional here. > When two companies have wildly different capital structures, you have to compare them on enterprise value, not the market cap of their equity. So while I give kudos to Tesla for building a valuable business, it still has a long way to go to catch up to Ford. That is not necessarily true. Market cap and enterprise value are two equally valid ways of measuring value or worth. There are even more ways to measure value, such as DCF or value of assets. All of these have their pros and cons. In this case, my personal opinion is that market cap is a very meaningful way to measure Tesla/Ford and that it's noteworthy that Tesla has passed Ford. I think it is very meaningful because it (loosely) implies that the present value of Tesla's profits (i.e. net profit after tax) is higher than Ford's. Even on a risk-weighted basis. Or, at least, that's roughly-kinda-sorta what the market believes. I would argue that enterprise value would be more meaningful that market cap if we were talking about which company was 'bigger'. However, the interesting thing here is that Tesla has become more 'valuable' than Ford, for this definition of value.

aerovistae 10y ago
Current amateur here. I feel like there's only one important thing to consider when comparing Tesla and Ford as investment opportunities: is their value likely to increase? With Tesla, there's an obvious path for potential massive growth. It's not guaranteed, but the potential is obvious. With Ford, it's like any other auto manufacturer. What surprises are we expecting? What new products or innovations? Does Ford have any path, even hypothetical, to massive market share growth relative to its current position the way Tesla does? It seems clear to me that the answer is no. Even if their Bolt is a success, they're not about to dominate the market, double their sales, and double their stock. They don't have any Model 3 type event on the horizon. So all these comparisons of financial metrics on current value, to me, seem pointless. This is the only thing that should matter (along with whatever analysis you want to use to gauge whether Tesla is likely to be able to execute on its plans, which is a more complex question-- but performance so far makes it clear that they are experiencing steady and dependable growth of production and sales with clear, well-defined plans for further future growth.)
- 10y ago