What Factors Could Affect Automakers’ Valuations in 2018?


Jan. 11 2018, Updated 7:30 a.m. ET

Mainstream automakers

So far in this series, we’ve explored how key auto industry players performed on Wall Street in 2017. Overall, 2017 proved to be a good year for auto stocks, with most of them ending the year in positive territory.

We’ll move on by discussing some factors that could affect the valuation multiples of these auto giants in 2018. But first, let’s take a quick look at their valuation multiples

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Forward valuation multiples

Let’s start by looking at automakers’ forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiples. On January 2, 2018, General Motors’ (GM) EV-to-EBITDA was 7.6x. This multiple was much lower than Ford Motor Company’s (F) 13.4x and Toyota Motor’s (TM) 9.6x, but it was higher than Fiat Chrysler Automobiles’ (FCAU) 2.1x.

These forward EV-to-EBITDA multiples were based on the expected next-12-month EBITDAs of these auto companies.

GM’s forward PE (price-to-earnings) multiple was 7.1x, lower than Ford’s 8.0x and Toyota’s 11.4x but higher than Fiat Chrysler’s 5.7x.

Fiat Chrysler has the lowest valuation multiples at the moment. Despite its recent improvements, FCAU still has a higher debt position and a lower profit margin than its peers.

What to watch

In the last three years, auto companies (IYK) have witnessed good times due to solid auto sales in the US market. In the first 11 months of 2017, US auto sales fell 1.5% YoY (year-over-year). According to Autodata, US truck sales rose 4.6% YoY in 2017. This higher demand for trucks and utility vehicles could be one of the key factors keeping auto investors’ optimism alive.

Weakness in US truck sales in the coming months could hurt automakers’ future earnings estimates, which could drive their valuation multiples lower in 2018.

In the next article, we’ll see how auto part retailers performed on Wall Street in 2017.


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