Valuation multiples for the top 5
Valuation multiples are widely used by investors to compare auto companies. These multiples can be used to compare companies that are similar in nature or size. Now let’s compare the valuation multiples of the top five auto stocks based on Wall Street ratings that we’ve already covered in this series. They include Fiat Chrysler (FCAU), General Motors (GM), Ferrari (RACE), Honda Motor (HMC), and Toyota Motor (TM).
Comparing valuation multiples
As of September 2017, GM’s forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple is 6.2x. That’s higher than FCAU’s at 2.1x but lower than Honda’s at 8.2x and Toyota’s at 9.5x.
GM’s forward PE (price-to-earnings) multiple is 6.5x, which is higher than Fiat’s at 6.1x but lower than Honda’s at 9.5x and Toyota’s at 10.7x.
These multiples were calculated based on Wall Street’s earnings estimates for the companies for the next 12 months.
Among these top five auto stocks, Ferrari has the highest EV-to-EBITDA multiple of 18.0x. Its forward PE multiple is 32.4x, the highest in the group. Its higher profitability and lower dependence on mass-market vehicle sales lowered its risk profile, which could be one key reason for its high valuation multiples.
Key factors to watch
In the last couple of years, the US auto industry (XLY) made new records for the highest auto sales in its history. However, US auto sales in the first eight months of 2017 have shown a negative trend, raising concerns about auto companies’ future growth.
A continuous fall in US vehicle sales could continue to hurt mainstream automakers and drive their future earnings estimates lower in the coming months. These lower future earnings estimates could also hurt auto companies’ valuation multiples, which are highly dependent on the US auto market.
In the next part, we’ll look at Japanese automakers and see why they’re in a better position so far in 2017 compared to their US competitors.