What Factors Could Affect Ford’s Valuation Multiples in 2Q16?
Higher Fleet Sales and the F-150 Drove Ford’s 1Q16 Earnings
Why valuation multiples?
Valuation multiples are widely used in the auto industry to compare companies. We can only use valuation multiples to compare companies that are similar in nature in terms of business, size, or financials.
In this manner, Ford Motor Company’s (F) valuation multiples can be compared with peers such as General Motors (GM) and Fiat Chrysler (FACU). In this article, we’ll find out what factors could affect Ford’s valuation multiples in the coming quarters. First, let’s take a look at Ford’s current valuation multiples.
Ford’s forward valuation multiples
The EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple values the worth of an entire company and not just its equity portion. Enterprise value is the market value of equity and debt less cash and cash equivalents.
As of May 2, 2016, Ford’s forward EV-to-EBITDA multiple was 3.0x, much higher than the multiples of its peers. In comparison, GM’s and FCAU’s forward EV-to-EBITDA multiples were 2.5x and 1.3x, respectively.
Ford’s forward PE (price-to-earnings) multiple was 6.5x—also lower than GM’s and FCAU’s forward PE multiples of 5.5x and 4.8x, respectively.
Note that the valuation multiples of Toyota (TM) are typically much higher than those of other major US automakers (RWL). This is partly because Toyota has a strong presence in the premium vehicle segment, which yields higher margins than the mass-marketed vehicle segment.
Key factors to watch in 2Q16
In 1Q16, Ford managed to post expanded margins. As noted earlier in this series, despite higher fleet sales, the company’s margins improved considerably. Expanded margins and higher fleet sales should help the company to expand its market share as well. Therefore, the continuity in this trend in 2Q16 could drive Ford’s future earnings growth, resulting in higher valuation multiples.
However, a potential slowdown in US auto sales may severely affect the future growth of US automakers, including Ford. Therefore, investors should pay attention to any data that reflects a possibility of a slowdown in US auto demand in the coming quarters.
Continue to the next and final article to know what technical analysis suggests for Ford’s stock.
Browse this series on Market Realist: