Analyzing Automakers’ Valuation Multiples before 4Q17 Earnings



Auto sector valuation

Valuation multiples are commonly used by investors to compare auto companies. These multiples could be used to compare companies that are similar in size or in the nature of the business.

Now, let’s see how valuation multiples of mainstream auto companies Ford (F), General Motors (GM), Toyota (TM), and Fiat Chrysler (FCAU) are trending at the beginning of 2018.

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Comparing valuation multiples

On January 19, Ford’s forward EV-to-EBITDA[1. enterprise value to earnings before interest, taxes, depreciation, and amortization] multiple was 13.3x. This was much higher than its home market competitor GM’s 8.2x and Japanese peer Toyota’s 10.2x. These valuation multiples were calculated based on estimated earnings of the respective companies for the next 12 months.

Ford’s forward price-to-earnings multiple was at 7.4x, slightly higher than GM’s 7.2x but much lower than Toyota’s 12.2x.

Among automakers under our coverage in this article, Fiat Chrysler has the lowest EV-to-EBITDA multiple of 2.5x. FCAU’s forward PE multiple was at 6.9x. The company’s relatively higher leverage position could be the key reason for its low valuation multiples, as significantly higher leverage increases the risk profile of a company.

Eyes on 4Q17 results

In 2015 and 2016, the US auto industry (IYK) broke new records for auto sales. However, US auto sales in 2017 have showcased a negative trend, raising concerns about the near-term growth of auto industry players. Despite last year’s softening US sales, higher pickup truck and utility vehicle demand could be keeping optimism alive among auto investors.

Going forward, a sharp weakness in US auto sales in the coming months could hurt auto investors’ sentiments. The auto industry’s weak 4Q17 earnings results could drive auto companies’ future earnings estimates downward. These lower future earnings estimates could also have a negative impact on automakers’ valuation multiples.

Read on to the next part where we’ll look at recent stock price movement of auto parts companies.


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