Valuation multiples in the auto industry
Investors often use valuation multiples to compare auto companies. These multiples are used to compare companies that are similar in nature or size. Let’s see how valuation multiples of mainstream auto companies General Motors (GM), Ford (F), Toyota (TM), and Fiat Chrysler (FCAU) are trending after their 3Q17 results.
Valuation multiples comparison
As of November 21, 2017, GM’s forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple was 6.4x. That was lower than competitors Ford at 13.5x and Toyota at 9.6x. These multiples were calculated based on estimated earnings of these companies for the next 12 months.
GM’s forward PE (price-to-earnings) multiple was 7.6x, which is slightly higher than Ford’s at 7.5x but lower than Toyota’s at 11.2x.
Among the major auto companies, Fiat Chrysler has the lowest EV-to-EBITDA multiple of 2.1x. Its forward PE multiple is 6.0x. The company’s higher leverage position, which also increases its risk profile, could be the key reason for its low valuation multiples.
Factors to watch in 4Q17
In the last couple of years, the US auto industry (IYK) has had new record high auto sales. However, US auto sales in nine of the first ten months of 2017 saw a negative trend, raising concerns about the near-term future growth of auto industry players.
A consistent weakness in US auto sales could hamper auto investors’ sentiments and drive down auto companies’ future earnings estimates. The estimates could have a negative impact on auto companies’ valuation multiples, especially for companies that are highly dependent on the US auto market.
Next, let’s look at the recent stock price movement of auto parts companies.