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Comparing Auto Companies’ Valuation Multiples in June 2017

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Auto companies’ valuations

In the auto industry, valuation multiples are widely used to compare companies. However, these multiples can only be used to compare companies that are similar in size, nature of business, or financials. In this part, we’ll compare the valuation multiples of mainstream automakers General Motors (GM), Ford (F), Toyota Motor (TM), and Fiat Chrysler Automobiles (FCAU).

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Comparing valuation multiples

As of June 13, 2017, GM’s forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple was 5.4x. That multiple was lower than direct competitor Ford’s at 13.0x and Toyota’s at 8.4x. These multiples were calculated based on estimated earnings of the respective companies for the next 12 months. Fiat Chrysler has the lowest EV-to-EBITDA multiple in the peer group at 1.7x.

GM’s forward price-to-earnings multiple, based on its earnings forecast for the next 12 months, was 5.7x, which was lower than Ford’s at 7.1x and Toyota’s 10.4x. Fiat Chrysler’s forward price-to-earnings multiple was 4.5x, the lowest among its peers.

FCAU’s higher risk profile due to its higher leverage position could be the primary reason for its lower valuation multiples.

Factors to watch

In the last couple of years, the US auto industry (FXD) has witnessed good times, with auto sales being at a record high in 2016. In the first five months of 2017, auto sales in the country have seen a negative trend. A continuous fall in US auto sales could badly hurt mainstream automakers and lower their future earnings estimates. These lower estimates could also negatively affect auto companies’ valuation multiples.

Next, we’ll look at analysts’ recommendations for auto parts companies.

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