As of April 20, 2017, General Motors’ (GM) forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple was 5.8x. This multiple is calculated based on the company’s estimated EBITDA for the next 12 months. Notably, GM’s EV-to-EBITDA multiple is much lower than Ford Motor’s (F), which was hovering at 12.1x as of the same date.
Forward PE multiple
GM’s forward PE (price-to-earnings) multiple, based on its earnings forecast for the next 12 months, now stands at 5.6x—lower than Ford’s 7.1x. But Fiat Chrysler Automobiles (FCAU) has the lowest EV-to-EBITDA multiple of 1.6x among automakers. FCAU’s relatively higher risk due to its high leverage position could be one of the key reasons for this low ratio.
Remember, automakers like Ferrari (RACE) typically trade at much higher valuation multiples than mainstream US automakers, partly because companies like Ferrari manufacture and sell only super luxury vehicles, which yield higher margins than mass-market vehicles.
For this reason, the valuation multiples of GM can really only be compared with peers like Ford and Fiat Chrysler, and not with Ferrari, due to business model type.
Factors affecting GM’s multiples
In the past year, GM’s profit margins have improved significantly and are better than its direct peers (XLY). This higher profitability is greatly dependent on the demand for pickup trucks and utility vehicles in North America. But such a high dependence on a single geographical market also increases the company’s risk profile, which might be keeping GM’s valuation multiples low.
We should note that a significantly higher risk profile for a company can lead to lower future growth estimates, which can drive a valuation multiple lower.
In the next and final part of this series, we’ll discuss GM’s price chart ahead of its 1Q17 earnings event.