Monday, 26 November 2012

Companies Focus – Global 11 VM Positioning – Q3 Coupled Ratios Analysis.

The previous weblog sought to highlight the use of ‘Coupled Ratios’ analysis.

A detailed yet still simplistic assessment methodology created by investment-auto-motives, which seeks to bridge the gap between the necessarily procedural and complex intelligence gathering of sell-side and buy-side analysts within the professional realm, and the oft limited appreciation of fundamentals analysis by the all too often indiscriminate private investor, who typically relies to a great extent upon belated news-stream information and/or (accumulated sub-conscious) instinct.

Application -

Having initially demonstrated the approach in June this year, with the prominent use of four distinct graphs - spanning a) Market Valuation Ratios, b) Profitability Ratios, c) Liquidity Ratios, and d) Debt Ratios – the intent of the last web-log was to illustrate how those VMs identified as theoretically ‘best positioned’ from that quantitative data, did indeed out-perform their auto-sector peers.

As seen, those were prominently: VW Group and Hyundai Motor, with relatively impressive share price rises over a very dour 6 month period for the sector, whilst an identified Renault saw limited share price damage compared to its international contemporaries.

Noted in the last web-log was FIAT SpA’s impressive valuation retention, thanks to both rebounding Chrysler sales within its N.A. home market and capital market sentiment buoyed by the ECB’s “backstop” QE announcement; so benefiting from dual tailwinds. FIAT-Chrysler's 'off-set' business model, and the assistance of US and European intervention, largely contrasting the fortunes of the 'recovering Japanese' and still 'domestic-centric French'.

March to September -             

General sector share price loss over this period was represented by an influx of negative readings within the bar chart, and manifestly described a dearth of market confidence in most auto-makers: all except for the few with a balanced global sales presence, the strongest of fundamentals and a fortunate mid-Atlantic centre of gravity.

For much of those six months most of the Global 11 automakers were still experiencing the aftermath of heavy physical and metaphorical storms, and whilst seeking to ready themselves for an eventual return to notional normality, were still highly cautious about over-promising to investors given the on-going ‘choppiness’ of the global economy.

Looking Forward -

This web-log seeks to revisit and re-deploy the ‘Coupled Ratios’ assessment method, by way of an updating of the four prime indicator graphs, and their respective ‘investment windows’, which provide an easy-read comparison between each VM.

The four established graphs displays both the previous Q1 position of each 'Global 11 VM' and each VM's present position using data obtained from various sources.

[NB. These are Capital IQ, Bloomberg, auto-makers' own IR reports, and where wholly unavailable modelled from previous H1 2012 data. It must be recognised that for obvious reasons the executives of various auto-makers have intentionally chosen to provide reduced levels of Q3 financial data where viewed as damaging, to even-out presented EoY performance over a cautious Q4, and for those best positioned to possibly provide for a positive FY2012 perceptional boost].

Findings -

These are presented in the established VM order of American, European, Japanese and Korean.

For the duration of this web-log, the accompanying respective chart (see top right) indicates both the previous Q1 position (company name) and the new Q3 based position (coloured roundel). Arrows of varying length show interim movement that has occurred. Where there has been no discernible movement the company name is shown with static symbols to either side.

Market Valuation Ratios:

GM (light blue) now sits at a P/E of 9.4 and P/B of 1.2, showing a substantial rise in its P/E rating from six months ago, as both the N.A. Economy and regional unit sales saw renewed confidence and traction mid year, boosted by trickle-down of QE liquidity into swelled credit availability for businesses and consumers.

Ford (dark blue) sits at a P/E of 8.6 and P/B of 2.1, its P/E raised substantially by much improved N.A. Earnings, though still marred by investor concerns regards the re-structuring of its European division, which Ford has since sought to quell with plant closures.

Volkswagen (grey) sits very stable with a P/E of 3.2 and P/B of 0.9, its solid positive performance provided from global footprint and broad vehicle range providing a balance-effect and immediately translated into an on-trend general share price rise, yet itself muted by the limited buying behaviour consequential from the restructuring of many European banks.

BMW (light green) sits at P/E 0f 9.0 and P/B of 1.4, the former indicator rising slightly as a probable result of pre-empting improved SME business conditions in the USA which provides a major sales base, the economic 'soft-landing' in China so maintaining sales traction with ongoing local factory CapEx and very probably assisted by domestic German equity buyers (institutional, commercial and private) buying 'safe' asset-backed, global-reach, and profit-stable German choices

Daimler (purple) sits at a P/E of 7.0 and P/B of 0.9, showing a valuation improvement in both measures as it becomes increasingly recognised that its broad vehicle range - spanning premium cars, light commercial vehicles, bus and coach and heavy goods vehicles – provides for a multi-aspect income boost as western economies slowly emerge from previous stagnation. Institutionals specifically recognising the deep levels of apparent CapEx Daimler has undertaken during the elongated downturn, and its efforts to better serve target sizeable small car and small van markets.

PSA (dark red) now sits at a P/E of effectively 0 and P/B of 0.1, highlighting its precarious finances, now seemingly underpinned by a E7bn loan to its finance division, which should feed liquidity through to both the core business and the consumer base, presumably to be alternately directed to create a virtuous demand circle. However, institutional investors seem yet to be convinced by the massive promised liquidity injection nor the 2015/16 rebound plan, including the GM alliance, seemingly awaiting a firm improvement in sales and income results.

Renault-Nissan (orange) sits at a P/E of 6.4 and P/B of 0.4, showing a slight strengthening of both indicators, very probably as a 'safer bet' consequence of PSA's woes. A previous valuation strengthening was seen during the period of ECB announcement optimism mid year, but dashed through Q3, now assisted by Nissan's expected sales improvement in the USA (given the North East's states' replacement effect from Hurricane Sandy) so buoying income.

FIAT-Chrysler (brown) sits at a P/E of 23.0 and P/B of 0.45. The former figure ostensibly highlights expectation of a much improved long-term tomorrow, having seen initially supportive US sales figures from Chrysler, the strong P/E presently pre-empting a long-term view of necessary European capacity restructuring and a strong sales flow ultimately derived from an increasingly synergised North America, South America and Europe, with the potential of an eventually expanded Eurozone market via western re-strengthening and new sales from commodities economies to the east of the Balkans.

Toyota (green) sits at a P/E of 14.8 and a P/B of 1.0, reflecting both a major improvement in earnings over the last few quarters, so reducing its relative P/E (having been at near 30) and the typically higher valuation metrics generated by an institutionally-heavy Japanese stock-market. But also the turnaround and 'new future' potential of Toyota (inc Lexus, Daihatsu and Hino) given its perceived massive technology lead with 'real-word' hybrid powertrain eco-tech, plus the expectation towards eco-intelligent transport and housing, core competences that Toyota has increasingly sought to weave together in Japan, seeking to export this capability across the world over the decades to come. So its seemingly high P/E valuation a result of a still optimistic Japan, domestically orientated local fund managers and the increasing interests of Asian funds (SWFs etc).

Honda (light red) sits at a P/E of 14.0 and a P/B of 1.0, with a similar story to Toyota (having been at a P/E of low 20s). Honda's dominance in motorcycles and domestic power generators is seen as a natural beneficiary from pan Asian growth, as bottom-tier consumers aspire to Honda 2-wheelers and new mid-tier consumers seek to aspire to 4-wheeled Honda vehicles, and power-packs becoming a household staple given the infrastructure-lag evident in fast growing communities. Thus ever since the legendary Honda Cub moped, the brand has retained close connection to Asia, but now must re-position itself vis a vis Toyota and other VMs in the west to maintain a clear product and eco-tech USP.

Hyundai (mid blue) sits at a P/E of 1.9 and a P/B of 0.3, and has effectively stayed static on both measures, a consequence of a positive climb in its GDR's in Europe and parallel confidence decline in the S.Korean KOSPI index over the same period; in which it is of course a major constituent. The emergence of the company's over-statement of fuel-efficiency figures had a momentary effect on sentiment but hardly displaces the perception that Hyundai, KIA and Genesis brands have increasingly strong credibility across the 3 all important regions of N.America, China and Europe, and will continue to build upon good standing within EM regions. As stated before, it is the general illiquidity of Hyundai Motor stock beyond the confines of Soeul and European bank GDR's which surpress broad market valuation.


As seen previously the 'investment window' seeks to deploy standardised demarkation lines where possible and elected demarkation to suit. However, the increasing availability of central bank enabled wholesale credit through a strengthening western banking systems prompts a widening of the investment window for Valuation Ratios. To this end the P/E indicator has been raised to 7.5, whilst the P/B indicator remains at 1.0; thereby reflecting funding conditions whilst also seeking to maintain a focus on theoretical 'under-price'.

As seen, the only remaining previous inhabitants of this window are Volkswagen, Hyundai and Renault (its P/E rise accompanied by the enlarged window). The markedly risen P/E of FIAT SpA has catapulted it out of the frame, whilst PSA's marked P/E decline positions it in the 'bottom-left' corner of near investor obscurity. (The converse argument being that as an increasingly eco-centric mass-market brand its strategic core competences and market valuation are diametrically opposed, so providing a good 'value-buy' story). Whilst previously on the border of the 'investment window' Daimler now sits fundamentally within the frame.

Thus on a valuation basis the auto-makers identified as most promising are: Volkwagen and Hyundai, followed by Daimler and Renault.

Profitability Ratios -

GM saw a profitability decline in Q3, from 5% profit margin and near 20% ROE to 3.8% and 13.2% respectively; thus falling away from investment window inclusion.

Ford likewise saw its performance fall even more dramatically from a 17% margin to 5%, with a lesser proportionate reduction in ROE to 140%, a consequence of the heavy asset-backed financing previously undertaken and being paid-down. Thus unlike its cross-town Detroit peer it just about stays within the required metrics.

Volkswagen appears to have enjoyed a remarkable 23% profit margin for Q3, yet it is a figure that was not explicitly stated in reporting, possibly arising from a negotiated 'profits taxation holiday' to support German industry. It will therefore possibly to provide an EoY surprise for investors, or allow a cushioning of any Q4 under-performance, and critically provides ongoing investment impetus for the institutional investment community (Germany especially so). Its ROE remained stable at 32%. This provides a clear boost to its leadership position at this point in time, though unexpected to be repeated in the near future.

BMW retained its 7% profit margin whilst seeing a decline in its ROE to 10.8% from near 20%. Thus

Daimler saw its profit margin reduced to 4.2% from 6% previously, and its ROE fall from 16% to 14.3%, so re-positioned just outside of the “investment window”.

PSA experienced a profit margin drop to -1.8% from 1%, and ROE drop to -5.8% from 6%, plainly highlighting its commercial and industrial concerns.

Renault-Nissan saw a profit margin fall to 3.8% from 5%, and an ROE fall to 6.9% from 8.5%, its greater non-EU market exposure via Nissan, Renault and Dacia brands providing the ability to sit close to but still beyond the investment frame.

FIAT SpA saw a notable decline in its performance in Q3, with a 1.4% profit margin from a previous 3% and 10.4% ROE from previous 20%. So propelled yet further from optimal investment ground; lower than all except the tortured PSA.

Toyota saw its placing improve, profit margin pulling strongly to 4.8% from approximately 2% and ROE raised to 8% from about 4%, assisted by the post-Fukushima replacement business and consumer purchasing, an FX declined Yen and upturn in NA sales.

Honda saw its profit margin grow but at a far slower pace than Toyota, up by 1% to 4.4%, and its ROE similarly rise to 7.9% from 6.5%.

Hyundai remained relatively static but strong with a 9.1% profit margin, down from its 'normative' 10% or so, and a ROE of 23.75%; spot-lighting its continued investment rational.


From the all important profitability perspective, there were clear sets of winners and losers. Volkswagen, Hyundai, BMW and Ford remained within the investment arena, whilst Daimler dropped just beyond the fringes.

The Japanese demonstrated an expected profitability rebound, heading back towards the 'window' whilst the remaining set, with FIAT stumbling in Q3 and PSA showing obvious heavy faltering.

Liquidity Ratios -

GM saw its liquidity substantially contract from a Operating Cash Flow measure of near 0.8 to 0.01, whilst its Current Ratio shrank slightly to 1.25, highlighting

Ford experienced a heavy liquidity loss, with Op C-F diminishing from 0.1 to 0.026, whilst driving down its liabilities to give a Current Ratio of 1.9, theoretically inefficient but providing a sound re-financing safety net for itself if at all necessary.

Volkswagen shrank its Op C-F to 0.06 from 0.1, whilst also seeing a reduced Current Ratio from 1.2 to 1.1.; a portion of the cash-flow possibility directed to bottom-line profit.

BMW saw its Op C-F reduced to 0.025 from 1.0, and its Current Ratio fall from 1.3 to 1.0.

Daimler stayed effectively static, with a bare minimum Op C-F of 0.003 and Current Ratio of 1.27.

PSA maintained a Current Ratio of 1.0 but saw Op C-F distorted to a lowly -0.006.

Renault-Nissan saw its Op C-F reduced to 0.043, whilst it retained a Current Ratio of 1.0.

FIAT-Chrysler experienced an Op C-F of 0.05, down from 0.2, and a Current Ratio of 1.4 from 1.6.

Toyota saw its Op C-F decrease to 0.065 from 0.15, and Current Ratio of 1.0 from a previous 1.2.

Honda had its Op C- fall to 0.024 from 0.18 and its Current Ratio of fall to 1.3 from 1.5

Hyundai Op C-F reduced to 0.046 from 0.13, and Current Ratio swell to 1.6 from 0.8.


Most auto-makers saw a heavy cash burn through the Q3 period as vehicle demand tailed-off from previous period highs, though for the lucky few, some of that Op C-F loss may have been appropriated toward either inward investment (seemingly so with Daimler) or toward boosted profits (as appears the case with Volkswagen)

However, no VM appears in the “investment window”. The closest players being Volkswagen and Toyota, who are closely jointly placed with 'best-in-class Op C-F of 0.06 and optimal Current Ratio of 1.0.

Debt Ratios -

GM has a much improved cash cushion of $37.5 and overall debt position of $113bn (although its highlights a lower mid-term debt obligation of $43.1bn). This now gives a general overall measure of 1 : 3 cash to deb, much removed from its previous apparent 1 : 1 position as then calculated.

Ford has cash of $24.1bn and debt of $26.4 (although states a mid-term obligation of $14.2). An impressive measure then of 1 : 1.1. This then equates to an apparent major debt reduction programme and increase in cash reserves.

Volkswagen remains largely static, showing gross cash of E25.7bn and debt E82.5bn, giving 1 : 3.2

BMW has cash of E13bn and overall debt of E102bn, thus 1 : 7.8. It saw both cash and debt levels rise by approximately 30% and 25% respectively

Daimler shows gross cash of E16.3bn and gross debt of 121.2bn, thus 1 : 7.4

PSA has liquidity of of E11.5 (largely government funded) and debt of E33.76, so 1 : 2.9

Renault-Nissan shows E7.5 cash and E51.3 debt, thus 1 : 6.84

FIAT-Chrysler stays generally 'in-situ', it has cash of E17.1bn and debt of E26.8bn, thus 1 : 1.56, a surprisingly good relative position.

Toyota with $39bn cash and $149 debt shows a major cash influx and slightly reduced debt level; its measure now 1 : 3.82

Honda remains generally stable with $12.5bn cash and $51bn debt; thus 1 : 4.

Hyundai stays relatively static with E13.42 cash and E31.8 debt

Results :

The order of cash to debt strength within the “investment window” is as follows: Ford best placed, a surprising FIAT second, Hyundai third, VW fourth, a “bailed-out” PSA fifth, Toyota sixth and lastly Honda seventh on the fringe.

Conclusion -

Category leaders are seen to be:

Valuation Ratios : Volkswagen, Hyundai, Renault

Profitability Ratios: Volkswagen, Hyundai, BMW & Ford / Daimler close to fringe.

Liquidity Ratios: No absolute leaders / VW and Toyota best placed.

Debt Ratios: Ford, FIAT, Hyundai, VW, PSA, Toyota & Honda

Consistent Appearance: Volkswagen (four times) & Hyundai (three times)

The onward positive strides of Volkswagen Group (now incorporating Porsche) and Hyundai (with conglomerate leverage and restructuring Korean industrial base) looks set to remain. Still set apart from other manufacturers regards the all important – and ironically obviously contrasting – indicators of valuation vs profit.

These 2 players then still stand head and shoulders above others; but the remainder of the VM pack is slowly improving.

The overall picture of the short and mid-term future then is not quite as clear-cut as it has been in recent times. The remaining German companies BMW and Daimler seek to defending profits and so may close the emerged gap between VW and themselves. The French firms of Renault and PSA are able to respectively pry 'value seeking' and 'brave turnaround' investor interest based upon deflated and 'market hammered' valuations and new liquidity availability. A Japanese resurgence by Toyota and Honda, assisted by a much weakened Yen provides confidence in their ability to repatriate the rewards of re-conquered US sales. But they will vie against a newly invigorated Detroit 'Big 3' with reduced immediate debts and public favour on-side within what seems a newly confident USA.

All auto-makers perceive what may be described as cautious optimism for the mid-term global economy and reduced concerns about an ever-lasting Eurozone drag stalling other regional economies.

Yet ironically, “outside the box” of the theorectical “investment window”, it could be FIAT SpA which once again provides a share price upturn, as possible speculators seek to beat the crowd so creating a possible self fulfilling pull, the same even possible of PSA.

But for now the risk averse will stick to the proven pack leaders and the improving middle pack; with the brave alpha seeking speculator looking to apparent stragglers with turnaround promise.

Post Script -

Whilst TATA Motors is indeed listed on Indian bourses and the NYSE, and has in recent times provided ever greater transparency regards sales, income and bottom-line performance of its Jaguar Land Rover division – itself with global reach – the fact that TATA badged vehicles do not as of yet enjoy global recognition by the public outside of India provides the rationale for omitting TATA Motors from the “Global VM” listing.

As and when TATA seeks to relinquish a partial sale of JLR via an IPO (on world exchange(s) outside of India), it will expand the current 11 VMs into a “Global 12”. The recent Credit Suisse event of 07.11.2012 highlighting the ongoing IR effort, further having seen an over-subscribed £1bn raised privately in May 2011 via 2018 & 2021 notes targeted at Indian and Asian buyers. However, it must also be stated that TATA Motors may wish to understandably raise the required JLR expansion capital by offering fixed income instruments to institutional investors, thereby avoiding a stock dilution, though those same institutionals may positively seek a JLR equity holding, given lowered risk-adversity anxiety amongst their own pension fund trustee clients. Though, the much improved liquidity available in Western bond markets, still available at low coupon rates, raises the prospect that a JLR IPO could be some time away, depending upon the growing appearance of recent “institutional activism”.