Friday, 6 September 2013

Companies Focus – Global Autos 11 – “Coupled Ratios” Analysis, During Current Jitters.

The previous two weblogs sought to convey the words of wisdom of the last century's renowned investors, of varying value-driven long termism, growth-driven medium to long termism and speculative short-terminism; a few able to employ all perspectives.

This weblog returns to reviewing the 'Coupled Ratios' of the eleven major auto-manufacturers, and with it the intentional value-orientated perspective that serves as its fundamentalist 'bottom-up' foundations.

This Q2 results derived web-log intentionally arrives relatively late, given previous stock-market nervousness, optimism and returned skittishness since late May, so as to relay a basic perspective, whilst present debate centres around CAPE derived valuation levels and national debt ceilings (once again) in in the US, the improved outlook of much of Northern Europe, a returned focus into a positively undervalued Southern Europe, aswell as the idea of possible 'bottom-fishing' across various EM regions.

However, with past and present value-seeking best serving over the long-term, today investment-auto-motives would be remiss as to not re-highlight the all to obvious important influence of immediate macro-level issues. Such as the possible disruption from a UN (or indeed non-UN) sanction Syrian strike, and the fact that major EM nations are still grappling with individual devaluation effects verses the $US, given the reported exodus of liquidity with the talk of US Fed 'tapering'.

[NB. Informed observers will note how the 'global economics story' can be shifted given its origin. perhaps the most pertinent being the positive devaluation effect for the US previously seen with QE tranches aiding debt devaluation and stock-market fervour, verses a negatively spun story of devaluation for India, Brazil, Indonesia, Turkey etc.

The seeming fact is that such a parallel EM experience will only serve to strengthen EM intra-trade ties and indeed acts as a partial 'de-coupling' from the notionally advanced nations; hoping to mimic Japan's experience over the last year, possibly using domestic QE to add to devaluation as necessary.

It substantially benefits 'foreign earners' with sizeable positive FX effect; aswell as providing investor impetus internally to the best placed domestic companies which enjoy mass-favour, any political influence and now a major pricing advantage versus importing foreign rivals. Whilst with potential internal inflationary effect also, though arguably artificially, re-strengthens growth levels. Thus the EM stock-markets outcome should be highly positive; as many mid-far horizon investors will recognise].

So as to maintain similarity the following text is essentially based upon a facsimile of the commentary format provided previously when last reviewing 'Coupled Ratios' for the year's first quarter.

To re-iterate, the methodology devised by investment-auto-motives uses complementary statistical measures and balance sheet/cash book figures, to provide a set of four dual-aspect graphs.

Each graph simply conjoins two standardised assessment criteria across both 'x' and 'y' axis, within which an intentionally conservative 'investment window' is shown. Its own frame governed by the standardised metrics pertaining to the lower-risk investment spectrum.

The assessment criteria spans

1. Market Valuation Ratios
2. Profitability Level Ratios
3. Liquidity Level Ratios
4. Debt Level Ratios

This method, whilst spread-sheet originated, provides a most useful overview when graphically depicted, typically illustrating the respective leaders, middlings and laggards.

The information sourced obviously comes from real-time/near-time data providers and Q2 2013 earnings reports (Q1/FY 2014 for Japanese firms).

It must once again be stated that those auto-makers with greatest European exposure – and so contracted sales – continued to provide only scant financial data; once again especially so regards the critical issue of operational cash-flows and capital expenditure.

Once again, to partially overcome this vacuum, assumptions have been made using calculated proxy data; so providing approximation where seen to be feasible

It should also again be stated that whilst Q2 2013 figures are hardly fresh at the beginning of September, the notion is that stock-markets have during this period are 'settled' well, and so providing a inference base before Q3 figures are reported.

[NB In past web-logs the investment windows were intentionally of a constrained, conservatively restricted size, reflecting the fragility of western and global economies and associated vehicle markets.

However, as liquidity finally enters business and consumer spheres – not just retained in capital markets – the PMI sits steady over '50', housing regains traction, and general B2B and B2C sentiment eases, even with the recent dip in corporate earnings, that overtly conservative investment window stance by investment-auto-motives has been slightly eased to mirror broader 'flowing capital' conditions.

To this end the P/E vs P/B window has been marginally enlarged ].

1. Market Valuation Ratios -

This measure combines P/E and P/B figures, and uses September data.

Those companies placed within or very near the extremes of the allotted 'investment window' are:
VW edging notably higher in p/e terms but near static on p/b (at 4.75, 0.95 respective 'co-ordinates'), Hyundai Motor expanding (at 2.7, 0.46) increasing both values, with both companies well inside the expanded window. Peugeot SA saw a notional decline on p/e (at -0.17, 0.42), so sat just beyond the boundary (but it should be noted that the previous calculation was based upon 'early-bird' investor sentiment then expecting reduced cash-burn and a mid-term turnaround0.

Previously in Q1 on the borders of the previous smaller investment window sat Renault and Daimler. However, even with an expanded window, Renault slips away given its increased p/e rating – itself indicative of higher risk early-bird sentiment – but Daimler with reduced p/e and slightly grown p/b (at 8.6, 1.4) remains close by the 'window frame', with BMW seeing similar values (at 9.2, 1.5).

Floating beyond the expanded investment window, at around the x10 p/e level sit Renault (at 13.7, 0.64) though a nominally richer p/e presently well under book value, with at near book value is a static Honda (at 14.2, 1.0). FIAT sits 'at book' but with higher p/e (at 21.0, 1.0). The remaining statically positioned outliers are Toyota (at 12.2, 1.2), GM (at 12.2, 1.7) and Ford furthest out (at 10.6, 3.3)

2. Profitability Level Ratios -

The measures herein are Profit Margin % and Return of Equity %.

Well within this unchanged 'investment window' sit the previous inhabitants of Hyundai (at 9.4%, 19.8%) so virtually static, Volkswagen (at 9%, 23.7%) slipped slightly on both measures, and BMW (at 6.8%, 17.4%). New entrants by way of Daimler (at 5.8%, 21.0%) growing both measures markedly and well inside the boundary, whilst Toyota (at 5.4%, 11.1%) positively nudges to sit on the investment window frame.

Below the window on similar profit levels but different return on equity levels are: Honda (at 3.5%, 7.7%), GM (at 3.6%, 13.5%) and Ford (at 4.2%, 33.2%; of which Honda and Ford were effectively static whilst GM contracted slightly.

Remaining are Renault (at 2.6%, 4.3%) with a notable Q2 contraction in both measures, FIAT stayed effectively static (at 0.4%, 12.3%), and Peugeot (at -8.5%, -44%), so 1% improvement in profit and -1.5% reduction in return on equity.

3. Liquidity Level Ratios -

The measures used are Current Ratio and Operational Cashflow Ratio.

[NB When necessary the 'CFR' is derived from the acknowledged calculation for Operating Cashflow...OCF = EBIT – (CapEx + financial investments costs).

Seen maintaining their respective positions within the investment window are: VW (at 1.0, 5.0) though notably declined from previous buoyancy, and BMW (at 1.1, 3.2) showing slight improvement.

Entering the investment space are GM (at 1.3, 6.0) so showing major OCF improvement thanks to its pick-up trucks, and Toyota (at 1.1, 2.5) enjoying the pricing flexibility of the devalued Yen, but the most impressive entry goes to Daimler (at 1.2, 3.8) highlighting its leap from previous negative OCF thanks to divestment of what was a draining EADS, improved platform economies giving its new compact car range and a healthier truck division

Leaving the arena is Hyundai (at 1.7, 1.8) caught by its domestic market slow-down and (as previously highlighted by investment-auto-motives) increased competition across the US and Europe.

Outside the window are: a statically placed Ford (at 1.65, 2.0), a strongly positively repositioned FIAT (at 1.4, 1.0) out of what was deep negative OCF, similar but smaller positive improvements with Honda (at 1.3, 0.2) and PSA (at 1.0, 0.2). However, Renault saw marked decline into negative OCF territory (at 1.0, -1.9).

4. Debt Level Ratios -

The measures herein are Liquidity and Debt levels. (The former includes available credit lines).

To aid immediate assessment, the graph is segmented into five distinct areas, pertaining to liquidity to debt ratios of at or under 1:1, 1:2, 1:3, 1:4 encompassing the 'investment window' and an area beyond this boundary.

Within the 1:2 segment, GM rises strongly in cash holding and debt reduction, to the better side of the area (at $34.8bn vs $43.1bn, from a previous $27.9bn vs $52.3bn), FIAT too improves within the same area (at E21bn vs E28.5bn, from before E11bn vs E29.28bn, but Renault moves most impressively (at E21bn vs E28.5bn, previously at E11.35bn vs E33.02bn).

Within the 1:3 segment, Hyundai enters having fallen from the superior area (at E17.99bn vs 49.55bn, formerly at at E13.65 vs E31.63) seeing increased liquidity subsumed to increased debt, PSA's standing slips (at E11.8bn vs E32.55bn, from E17.5bn vs 32.55bn) highlighting previous cash-burn during Q2, whilst more impressively Ford gains (at $37.1bn vs $106bn, from before $24.18 vs $107.6bn), showing small rise in debt against over 50% improvement in liquidity.

Within the 1:4 segment, VW shows slight improvement (at E25.83bn vs E99.62bn, from previously E22.5, E99.62) showing pro-liquidity management, Honda weakened (at $14.48bn vs $66.27bn, previously at $15.33bn vs $62.19bn) losing some liquidity and adding to debt. Toyota and Daimler join this group, Toyota (at $46.15bn vs $187bn, previously at $30.73bn vs $179.57bn) demonstrates a 50% increase in liquidity thanks to 'Abenomics' and boosted US sales with proportionately lesser addition to debt, whilst Daimler nudges onto the investment window boundary (at E18.54bn vs E78.4bn, against E E17.7bn vs E78.74bn in Q1)

BMW (at E12.76bn vs E69.6bn, against E11.3 vs E70.44) still remains outside the broad investment window.

Results -

Valuation Ratio :
Hyundai, Volkswagen
(with BMW and Daimler close too the upper boundary and nascent Peugeot close to lower boundary)

Profitability Ratio :
Hyundai, Volkswagen. BMW, (newly entered) Daimler and Toyota on the boundary
(others static or contracted)

Liquidity Ratio :
Volkswagen, BMW, newly entered GM, Daimler and Toyota
(FIAT showing fast approach toward window)

Debt Ratio:
GM, FIAT, Renault

Ranked Orders -

The following shows the obvious ranked order of 'investment window' appearances.

Four Windows: None
Three Windows: Volkswagen
Two Windows: Hyundai, BMW, Daimler, Toyota, GM
One Window: Renault, FIAT

Conclusion -

Look closely at the positional dynamics of the Automotive Global 11 and between Q1 and Q2 2013 and though the quarter saw generally declined growth – given previous quarterly spurts - overall the general picture has shifted toward more levelled conditions.

From a global perspective, consumption power of more credit-accessible, more confident returning western individuals and businesses continued to fill the post 2008 'volume vacuum'. Thus firstly aiding those American and Japanese mainstream players which had suffered, now seeing similar effects in Europe.

Volkswagen maintains ownership of the 'crown' having seen its closest investor rival Hyundai slip somewhat. Given the importance of the macro-economic cycle to all players, in cycling terms although VW maintains itself wearing the 'yellow jersey' the peloton behind has grown in numbers and force, thus adding new pressure upon VW and a presently slipped, previously strong, Hyundai.

Now that central bank liquidity is flowing through the improved transmission mechanism of international and national banking, and indeed allowed many auto-makers to expand their captive finance houses to act as 'new banks', the previous well constructed mixed advantage of product quality / product price, maintained residual values and vitally strong balance sheet will be eroded by re-capitalised competition seeking a market-share rebalancing.

But unlike the voracious past leading up to 20008, far greater cross-cooperation will be ongoing across manufacturers and their traditional and non-traditional suppliers so as to amortise research, development and production costs; and as seen with Japan's segment-bias approach by Toyota, Honda and Nissan in North America, though the overall 'market pie' is enlarging, few manufacturers are in the position to 'eat their competitor's lunch'.

Hence, today's and tomorrow's strengthened demand, better plant utilization rates and accordant capacity growth, vital continued cost containment, suppressed platform engineering costs with high-value IT content, and subtly understood territory's based on core competencies bodes well for all eleven global producers.

And as positively for the long-term horizon - especially possible emergence of new 'auto-multi-nationals' - the currency and reforms shifts that should engender a new revitalised economic phase for East and West, South and North alike (see below)

From the investor's perspective, attuned individuals and private equity have and will continue to like the 'early-bird' turnaround opportunities, whilst pension and insurance institutionals will be happy to seen global auto companies back on their historical growth track.

Post Script -

The previous post-script mentioned that the West's previous massive economic disruption post 2008 had played to the advantage of those lower-cost auto-makers which could leverage both large scale low-cost domestic production for export with a broadening global manufacturing and sales foot-print; able to strongly vie against what had been a floundering old-guard producers.

It then noted that as the western world slowly returns to a more normalised 'new-norm' – with renewed lowered cost-base climate - those firms which by default gained between 2008 to 2012 would face greater competitive headwinds. So raising the spectre of previous winners lobbying home governments for greater FX 'flexibility' (depreciation), in order to match the deflationary competitive advantage already seen to work in America, Europe and now Japan.

On the surface much the same effect has come into being via the much reported 'EM capital flight', so avoiding an explicit state of hostile 'currency wars', but positively providing renewed vigour centred upon domestic investment and consumption but with pan-Asian effects.

Of note regards vehicle production and associated costs is the fact that the devaluation of the Brazilian Real will assist the foreign exportation of primarily FIAT and VW vehicles. Whilst the substantive drop of the Indian Rupee will primarily assist the Nissan-Suzuki JV internationally and TATA regionally and domestically. Indonesia's lowered Rupiah helps Japan's local transplant factories. However, S.Korea's Won whilst devalued against the $US between March and late June has re-strengthened back to the March level, so leaving it comparatively strong against Asian peers; notionally to the detriment of Hyundai Motor unless it can demonstrate itself as truly on par regards quality and pricing with American and European rivals, though the FX headwind may be off-set by China's affection for its brands.