What Could Drive GM’s Valuation Multiples in 1Q18?



GM’s valuation multiples

As of February 6, General Motors’ (GM) forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple was 7.7x. This multiple was much lower than direct peer Ford’s (F) 13.5x. These multiples are calculated based on the respective companies’ estimated EBITDA for the next 12 months.

At the same time, Fiat Chrysler (FCAU) had the lowest EV-to-EBITDA multiple of 2.3x. The company’s higher leverage position as compared to its peers could be one of the key reasons for its lower multiples.

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Forward PE

Based on their earnings forecast for the next 12 months, GM’s and Ford’s forward PE (price-to-earnings) multiple stood at 6.9x and 6.8x. The valuation multiples of Ferrari (RACE) are typically much higher than those of mainstream US automakers (VCR), primarily because Ferrari produces only luxury vehicles, which tend to yield much higher profits as compared to other mass-market vehicles.

Key factors to watch in 1Q18

In 4Q17, GM continued to showcase its ability to expand its profitability despite softening US sales. In 2017, the company also announced it would exit some of its unprofitable markets including Europe and India. Therefore, GM’s focus on profitability from North America and other international markets is likely to have a higher weight.

Nevertheless, investors should monitor US auto sales, as any significant drop in US vehicle sales could hurt GM’s future earnings growth. Weakness in sales could also drive GM’s valuation multiples lower in 1Q18.

Continue to the next part where we’ll explore what Wall Street analysts are recommending on GM stock after its 4Q17 results.


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