Valuation multiples in the auto industry
Investors commonly use valuation multiples to compare auto companies. These multiples can be used to compare entities that are similar in size or in nature of the business. Now, let’s take a look at valuation multiples of mainstream auto companies General Motors (GM), Ford (F), Toyota (TM), and Fiat Chrysler (FCAU).
Comparing valuation multiples of auto companies
As of October 11, GM’s forward EV-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) multiple was 7.3x. This was lower than its direct competitor Ford’s 13.2x and Toyota’s 9.5x. These multiples were calculated based on estimated earnings of the respective companies for the next 12 months.
Similarly, GM’s forward price-to-earnings multiple was at 7.1x, which is lower than Ford’s at 7.7x and Toyota at 11.9x. In the auto sector, Fiat Chrysler has the lowest EV-to-EBITDA multiple of 2.2x. Similarly, FCAU’s forward PE multiple was at 6.3x, the lowest in its peer group. The company’s higher leverage position, which also increases its risk profile, could be the key reason for its low valuation multiples.
Key risk factors to keep an eye on
In the last couple of years, the US auto industry (IYK) saw record auto sales. However, US auto sales in the first nine months of 2017 have seen a negative trend, raising concerns about auto companies’ near-term future growth.
A continuous drop in US auto sales could hurt auto investors’ sentiments and drive auto companies’ future earnings estimates lower. These lower future earnings estimates could also affect those auto companies’ valuation multiples, which are highly dependent on the US auto market.
Continue to the next part where we’ll look at the recent stock price movement of auto parts companies.