Toyota’s valuation methods
There are a variety of valuation methods available to value an automaker like Toyota (TM). We believe that investors should use a combination of discounted cash flow and valuation multiples to value the company.
First, let’s use a relative valuation method based on Toyota’s valuation multiples. We’ll discuss the DCF (discount cash flow) valuation method later.
The EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple is an important relative valuation multiple. It’s generally used for capital-intensive industries such as the automotive industry (FXD).
On May 23, 2016, Toyota had a forward EV-to-EBITDA multiple of 2.8x for the next 12 months. This is higher than the valuation multiples of its closest peers like General Motors’ (GM) 2.5x, Ford’s (F) 2.9x, and Fiat Chrysler’s (FCAU) 1.5x for the same period.
Currently, the valuation multiples and stock price of mainstream automakers, including Toyota, are in a negative trend. This could be because of the concern that US auto sales may have already peaked last year.
Forward price-to-earnings multiple
The forward PE (price-to-earnings) multiple takes into account the equity portion of a company. On May 23, 2016, Toyota’s forward PE ratio, based on earnings forecasts for the next 12 months, stood at 8.0x, also much higher than Ford’s 6.2x and GM’s 5.3x.
GM’s and Ford’s higher dependency on the US auto market alone could be one of the reasons why Wall Street is valuing these automakers lower than Toyota.
Discounted cash flow method
Toyota (TM) has a mature business model with predictable cash flows, unlike any new auto company such as Tesla (TSLA). This makes the DCF method appropriate for valuing Toyota’s business. However, the cyclical nature of the automotive industry could be a challenge when using the DCF method to value the company.
Read on to the final article of the series, where we’ll talk about some key factors that may affect Toyota’s valuation multiples going forward.