What’s Next in Valuation Multiples for Automakers?
Decoding the Auto Industry's 1Q16 Earnings
Valuation multiples
Valuation multiples are widely used in the auto industry to compare companies. But we can only use them to compare companies that are similar in business, size, and financials. So we’ll compare the valuation multiples of automakers General Motors (GM), Ford (F), and Fiat Chrysler Automobiles (FCAU).
Automakers’ valuation multiples
The EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple is an important relative valuation multiple. It’s generally used for capital-intensive industries such as the automotive industry.
As of May 16, 2016, GM’s forward EV-to-EBITDA multiple is 2.7x. This multiple is lower than Ford’s, its direct competitor, at 3.2x. These multiples are calculated based on estimated EBITDA of the respective companies for the next 12 months. While Fiat Chrysler has the lowest EV-to-EBITDA multiple of 1.4x, the company’s risk profile is higher than its peers’ with high leverage.
GM’s forward PE (price-to-earnings) multiple, based on its earnings forecast for the next 12 months, stands at 5.8x, which is lower than Ford’s at 6.9x. FCAU’s forward PE multiple is 4.9x, which is also lower than its peers’.
Notably, Italian automaker Ferrari’s (RACE) valuation multiples are trading much higher than other mass market automakers, including GM, Ford, and FCAU.
Factors affecting automakers’ valuations
Lower valuation multiples alone don’t give a fair idea of the attractiveness of a company’s stock. We must also look at a company’s future earnings growth prospects and risk profile.
In 1Q16, all mainstream automakers managed to post expanded margins. However, Ford’s margins improved considerably despite higher fleet sales. Fleet vehicle sales typically tend to have lower margins than retail vehicle sales. But higher fleet sales should help the company expand its market share. If this trend continues in 2Q16, it could drive Ford’s future earnings growth, resulting in higher valuation multiples.
Note that for the last several years, GM has been cutting its fleet sales to expand margins. However, this strategy has taken a toll on the company’s market share.
A potential slowdown in US auto sales may severely affect the future growth of US automakers (IYK). In the coming quarters, investors may want to pay attention to any data that reflect a possibility of a slowdown in US auto demand.
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