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Examining the Auto Industry’s Valuations after 4Q17 Earnings

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Feb. 27 2018, Updated 7:30 a.m. ET

Auto companies’ valuations

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

Let’s see how the valuation multiples of mainstream auto companies Ford Motor Company (F), Toyota Motor (TM), General Motors (GM), and Fiat Chrysler Automobiles (FCAU) are trending in February 2018.

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Forward valuation

As of February 20, 2018, Ford’s forward EV-to-EBITDA (earnings before interest, tax, depreciation, and amortization) multiple was 12.8x, much higher than its home market competitor GM’s 7.0x and Japanese peer Toyota’s 9.2x. These valuation multiples were calculated based on the estimated earnings of the respective automakers for the next 12 months.

Likewise, Ford’s forward PE (price-to-earnings multiple) was 6.8x, slightly higher than GM’s 6.4x but much lower than Toyota’s 10.1x.

Among the auto giants under review in this article, Fiat Chrysler has the lowest EV-to-EBITDA multiple of 2.3x and forward PE of 5.7x. The company’s relatively high leverage position could be the key reason for its low valuation multiples, as significantly higher leverage increases the risk profile of a business.

Key factors

In 2015 and 2016, the US auto industry (VCR) made new records for the highest auto sales. However, in 2017, US auto sales 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, sharp weakness in US auto sales in the coming months could hurt auto investors’ sentiments and could drive auto companies’ future earnings estimates downward. These lower future earnings estimates could also negatively affect automakers’ valuation multiples.

In the next article, we’ll look at the recent stock price movements of auto parts companies.

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