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.
