Fiat Chrysler’s current valuation multiples
Fiat Chrysler Automobiles (FCAU) has a forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 1.7x for the next 12 months. A forward EV-to-EBITDA multiple tells us how a company is valued for each dollar of EBITDA.
FCAU’s EV-to-EBITDA is lower than forward multiples of other leading automakers, with General Motors (GM), Ford Motor Company (F), and Toyota (TM) holding multiples of 2.1x, 2.8x, and 4.7x, respectively. It’s also important for investors to be aware that these valuation multiples can go lower or higher based on various internal and external risk factors, which we’ll discuss in this part of the series.
Risk factors affecting FCAU’s valuation
Fiat Chrysler has the highest debt levels among its peers. The company also has plans to expand its presence in the luxury car segment in the near term, which could be a tough bet for the already debt-burdened company. This increases the company’s risk profile and negatively affects its future growth estimates. This is why Fiat Chrysler has lower valuation multiples.
Likewise, if we look at the ATP (average transaction price) of the company’s vehicles, it is well below that of its peers. In recent years, the company has been reiterating its plans to boost its profit margins and make its ATP comparable with that of General Motors and Ford. Analysts’ estimates suggest some improvement in Fiat Chrysler’s profit margin in 2016 and 2017, from 0.3% in 2015 to 2.2% in 2017. This could imply that the market might have already taken the impact of such steps into account in its valuations. Therefore, any delay in implementation of the action plan to expand its margins in the coming quarters may lower these estimates and drive its valuation multiples further lower.
Auto industry demand
The auto industry (FXD) is highly cyclical in nature. Therefore, it is important for investors to pay attention to overall auto demand while considering key factors specific to the company. North American auto demand expanded to 17.4 million units last year, growing by 6% over the total from the year earlier, which was the highest in US auto sales history. There is some concern that auto sales and other economic indicators suggest a slowdown. This concern may affect future growth estimates for automakers, thereby driving their valuation multiples lower.