Forward valuation multiples
Forward valuation multiples are widely used in the auto industry to compare different companies. It’s important to understand that this comparison can only be made between companies that are similar in business, size, or financials.
Fiat Chrysler’s valuation
As of December 27, 2017, FCAU’s forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple was 2.1x. This multiple was calculated based on its estimated EBITDA for the next 12 months.
By comparison, the forward EV-to-EBITDA multiples of automakers (IYK) GM, Ford, and Toyota were much higher, at 8.0x 13.5x, and 9.7x, respectively.
Fiat Chrysler’s forward PE (price-to-earnings) multiple was 5.8x, which was much lower than the multiples of peers GM, Ford, and TM. At the time, GM’s, Ford’s, and TM’s PE multiples were 7.1x, 8.0x, and 11.5x, respectively.
Factors to watch
At the end of 3Q17, Fiat Chrysler Automobiles’ net industrial debt stood at 4.4 billion euros, or about $5.2 billion. This reflected an increase from 4.2 billion euros, or ~$4.9 billion, since the end of 2Q17. That said, FCAU had a much higher net industrial debt of ~6.5 billion euros, or ~$7.6 billion, one year ago.
In general, a higher debt position increases a company’s risk profile and drive its valuation multiples downward. For this reason, the continued improvements in FCAU’s debt position and its consistent profit margin expansion could drive its valuation multiples higher going into 2018.
Continue to the next part of this series to learn about the key support and resistance levels for Fiat Chrysler stock.