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Comparing Auto Industry Valuation Multiples

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Apr. 18 2018, Updated 7:30 a.m. ET

Auto sector valuation

In the auto sector, valuation multiples are used by investors to compare companies that are similar in size or business. Let’s take a look at these multiples for mainstream auto companies Toyota (TM), Ford (F), General Motors (GM), and Fiat Chrysler (FCAU).

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Comparing multiples

As of April 11, Ford’s next-12-month EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple was 13.6x, much higher than direct competitor GM’s 7.1x and Japanese peer Toyota’s 9.0x. On the other hand, Ford’s forward PE (price-to-earnings) multiple was 7.4x, higher than GM’s 6.1x but much lower than Toyota’s 9.7x.

Among the auto industry players we’re focusing on, Fiat Chrysler has the lowest EV-to-EBITDA and PE multiples, of 2.4x and 5.7x, respectively. The company’s high leverage could be the key reason for its low valuation, as higher leverage exposes companies to higher risks.

Factors to watch closely

In 2015 and 2016, the US auto industry (FXD) reached auto sales highs. However, US auto sales fell in 2017, fueling concerns about auto companies’ near-term growth. However, higher demand for pickup trucks and sports utility vehicles may be keeping optimism alive.

In 1Q18, US light vehicle sales rose 1.9% year-over-year, boosting auto investors’ hopes. In 2Q18, US auto demand has continued to rise and support investors’ confidence, which may boost auto industry players’ earnings estimates and valuation multiples. Continue to the next part, where we’ll look at auto part companies’ recent stock prices.

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