Forward valuation multiples
Using valuation multiples is one of the most popular ways to compare companies in the auto industry. However, it’s also important to note that only companies with similarities in business, size, and financials should be compared. In this part, we’ll compare three auto giants’ forward valuation multiples—General Motors (GM), Fiat Chrysler (FCAU), and Ford (F).
Comparing valuation multiples
As of August 16, 2017, General Motors’ forward EV-to-EBITDA multiple was 5.9x. General Motors’ multiple was much lower than Ford’s multiple at 13.5x. Fiat Chrysler had the lowest EV-to-EBITDA multiple of 1.7x.
These forward multiples are calculated based on the estimated EBITDA (earnings before interest, taxes, depreciation, and amortization) of the respective companies for the next 12 months.
General Motors’ forward PE (price-to-earnings) multiple, based on its earnings forecast for the next 12 months, was 5.9x. General Motors’ PE multiple was lower than Ford’s PE multiple at 6.7. Fiat Chrysler’s forward PE multiple was 4.5x, which was much lower than its competitors.
Fiat Chrysler’s higher leverage position could be the primary reason for its lower valuation multiples.
Key factors to watch ahead
In the past few years, the US auto industry witnessed good times with record high sales in 2016. However, US auto sales have fallen in the first seven months of 2017. Any downturn in US auto sales could have a negative impact on mainstream automakers’ future growth estimates. A downturn could drive their valuation multiples lower. Auto investors need to watch US auto sales data closely in the coming months to confirm any signs of weakness.
Note that auto giants (FXD) such as Ford, General Motors, Fiat Chrysler, and Toyota (TM) make a significant portion of their revenues from the US. As a result, softening US auto sales could impact automakers. In contrast, Volkswagen (VLKAY) generates most of its revenue from Europe.
In the next part, we’ll find out what Wall Street analysts are recommending for auto stocks.