Saturday, 18 January 2014

Macro Level Trends – Western P/E Ratios – When Price to Earnings Meets Perceptional Expectations of a Better Tomorrow

The Detroit Motor Show (or North American International Automotive Show) has kick-started the new auto-exhibition calendar.

Domestically, the “Big 3” are eager to demonstrate an ability to not only satisfy the domestic market's strengthening confidence – as Yellen balances QE tapering measures vis a vis economic growth – but also critically to highlight the notion that even if Detroit is a bankrupt city, its prime pan-American and pan-global inhabitants remain investment propositions

Re-Jigged Business Models -

The much noted return of mid-size pick-ups was always expected given Detroit's desire to re-broaden its vehicle range and re-capture the previously lost smaller 'tradie' commercial customer and younger private-buy male and female truck customers of the Mid-West and South. So as to now gain improved unit margins these smaller trucks (formerly S10 and Ranger) have for some time been produced in the likes of Thailand and Brazil to create better quality local supply bases. This then allows for even today a reduced 'Bill of Materials' (especially regards low-value components) which can be shipped to the US for local assembly - such as at the Chevrolet plant in Wentzville, Missouri - in effect a reversal of what was previously outward-bound CKD (“Complete Knock Down”).

All the while US auto-makers still gaining good margins on full-sized trucks and additionally seeking-out engineering synergies between mid-size and large pick-ups; so creating a virtuous cost-saving circle from basic input materials to what are deemed value-adding electronics. (Though the content-loading of various cars vs sales incentive discounting undermines the basic profit model, even with reduced cost stepped scale purchasing)

And of course a new era in pay-relations is well under way with previous UAW recognition of the necessary labour-rates and employment terms US players must deploy given global VM competitor strength.

So the US is seen to be undergoing an economic transformation, as the country weans itself off of the Federal induced national expansion of money supply toward a more state and regionally based generation of value, primarily for domestic but also export consumption.

The Prophecies of Profit -

Such insights (across all sectors from Energy to Housing to IT) into how North America will maintain its corporate profitability are today of vital importance presently. Since in recent months there has been much talk of possible US capital market's returned over-exuberance - as recently showcased by Prof Shiller's CAPE P/E Index. The dangers of short-term market over-heating was mentioned many months or so ago by investment-auto-motives, stating the need for a mild correction before returning to a steady upward trajectory in what are historically momentis times.
That proviso given since investment-auto-motives had concerns that an extended market irrationality and subsequent negative over-reaction (ie major sell-off) would drastically harm what in reality appears a substantive rebuilding of corporate America and so the national economy. The lowered-cost business plan efforts of US automakers a core economic pillar in that industrial revival.

Valuations -
As specifically regards the capital markets attitude toward Detroit's 'Big 3', such a correction was seen with Ford in a very orderly manner between October and December, and is seemingly yet to arrive with an aguably over-vitalised GM (unless it can continually beat expectations), and was partially seen in FIAT-Chrysler over H2 2013, but largely negated given its expected and now announced complete integratio.
As per market valuations, as of 16.01.2014 (or in US-speak 01.16.2014) their price-earnings ratios respectively stood at:
GM: 16.75
Ford: 11.79
FIAT (Chrysler): 24.77
Thus we see a great valuations spread between these presently US-centric producers, far more explicable in FIAT's case given the still seen 'early-bird' investor sentiment which boosts its p/e rating given its overall lower corporate profits but in expectation of a better tomorrow. But is GM truly that much better a company than Ford?
Of greatest interest here is the effective dissimilarity of GM and Ford, of course partly explained by GM's greater exposure to China and lesser debt levels. Yet still such a marked difference presently points to possibly either Ford being under-valued or GM over-valued; or partly both.

The Valuation Dilemma -
This present “valuation dilemma” has ostensibly been with us since 2009 given the previous lack of true foundations upon which conservative, fundamentals based valuation metrics are set. But as normality continues to return so better reasoning can be applied; this transition itself highlighted over a year ago, with the very expectations of such as transition adding to market complexity through perceptional behavioural dynamics.
It is these still firming market perceptions, and the previously unconventional behaviour of markets - though not all too surprising during unconventional times using unconventional macro-policies - which have driven the need for assumed understanding and an effort toward explanation.

Generalistic Overviews -
One such is the seemingly ever-present 'bible' of the Shiller Historical Price-Earnings Index of the Standard and Poor's 500. Recently re-presented - along with seemingly supportive alternative P/E historical charts from Goldmas Sachs – it states that the S&P is presently largely over-priced and so it is to be presumed that a noted possibly large correction is to be expected, and concerns about future growth into 2014, especially after the large 54% gain over the previous 2 years.
But is that really the case?
Generalisations rarely provide a true reflection, especially so here, given the innate complexities of massive-scale capital markets.
Whilst investment-auto-motives has indeed highlighted the appearance of a general market overun, seemingly noted in the 'running before walking' of some valuation expectations, it has also stated on numerous occaisions that not just today, but throughout 2013, that generated whole market valuations must 'drilled into' to provide be far more sectorial and company interpretation.

Improved Conditions for Frankenstein Markets -
Yet investment-auto-motives is also very much cogniscent of this still re-awakening period within western economies, the US being the furthest forward, so a long run of future value awaiting, but also weary of the overt valuation generalisations that occur from simplistic market modelling.
Firstly the S&P has always been an evolving beast, so whether: the shape of a specific veteran company, the indice's own constituent companies or its sector biases, no true 'like for like' historical overview can be captured; since its very being has altered massively.
Secondly, arguably ever since the dotcom era, what were old fashioned valuation disciplines have been markedly altered as western capital markets seemingly 'bake-in' much more mid and long-term value expectation, this trend driven by the ever rising crop of venture companies, which in turn has become intentionally or unintentionally index altering
The once high double digit, triple digit and even quadruple digit P/E numbers once reserved for historically proven but temporarily cyclically un-aligned sectors (ie insurance, commodities etc), have over the last 20 years been applied to the big promises of new technologically or sector-specific 'disruptive companies'. Some may indeed last and prosper, but (as historically seen) many will wither away as a consequence of either ill-considered business models, changed environment conditions, competitor actions or early phase acquisitions. So what may become highly valued but unproven enterprises fail to live up to their supposeldy long-term based valuations standing; with to outsiders some having been created simply as money-making entry and exit ventures for the founders, with little true regard for the interests of long-view investors. Yet their very existance changes valuation perceptions and has an impact on the averaged index.
Thirdly, the world of finance itself has massively affected western indices. The massive growth of the financial services sector, powered by IT and linked to an ever griowing inter-connected global web of physical and service industries, has helped improve the lives of billions of people. But it has also become a very complex animal in terms of its financial instruments and its algoritjmic trading methods, and (as seen by the financial crisis) has itself a massive influence on the make-up of western capital markets regards perceived corporate valuations.
These aspects have had important influence on the very DNA of western capital markets, just as newer EM bourses have their own biases and indiosyncracies, though less complex. Yet unlike true biological DNA which has a constant strong inter-generational thread, modern markets should be seen as hybridised, possibly even Frankensteinian, given how technological, business, financial and trading innovations have altered the once simple markets' DNA.
So whilst well intended, any modern attempt today to simplify the whole market may be unwittingly counter-productive, even if easy to absorb.
The very fact is that their are still extremes in mass market P/E valutions means that any averaged indices, even if seemingly well weighted, becomes less insightful for whatever type of investor.
Whether a long-term or short term investor, better to look at the big picture for specifc companies – the bottom-up and top-down approaches of micro and macro. Necessary whether on-board for the long-haul or seeking out temporary valuation descrepancies.
However before doing so regards the US Automotive sector, investment-auto-motives will take a quick look at the generalised whole market approach, not so to wholly undermine it, but to set it in context, so that it may be viewed in the appropriate economic background.

The Present Wall St “Exuberance”-
One of the more academically respected models is the now well established Shiller CAPE Index: the Cyclically Adjusted Price Earnings Index. As the name posits, the CAPE is a measure which seeks to smooth -out any immediate earnings volatility by utilising a measure based upon an average of the last 10 years worth of corporate earnings.
This approach is effectively engrained in equities analysis, its origins in the original stock-picking 'bible' 'Securities Analysis' by Benjamin Graham and David Dodd, as compiled at the beginning of last century.
Robert Shiller's own work has been extended further and applied to over 30 foreign markets worldwide
Presently the Shiller CAPE model states that the US market sits in what may be described as historically high territory, somewhere in the price range of 23/24 x trailing (2013) earnings.
But this is a backward-looking measure which encoompasses what could be described as a tough period for corporates. All the more so when viewed over the prescribed context of the last 5 and 10 years. American corporations have started to re-invest in what are costly capital expenditure projects, so as to both be ahead of B2B and B2B consumptive expansion and indeed prompt such expansion through investment and re-employment. Set over the relatively poor earnings of the last 5 years and the much diluted earnings of teh last decade, it is little surprise that presently, on an averaged P/E of 23 or 24 x ttm (trailing twelve months) that the prices now paid for various American domestic stocks do indeed stand high.
But this cannot be viewed as such in the now expanding macro-econiomic context, it is simply an unflattering measure applied in what is the apex of an unusual historical period.
To better set that into context the following reviews P/E rates from 1898 to date throughout the depressionary and recessionary peaks and troughs.

Depressions and Rebounds:
1916-20 trough at p/e of 4, followed by exuberant high of 33 prior to 1929 crash
1931-36 trough at p/e of 4 (again), peak at 22
2008 fall from 27 to 12
2009 trough of 12, peak of 17 in 2010
2013 current at p/e of 17
Here in basic terms we see that in the first half of the 20th century that p/e measures rated at 4x were seen as low buy opportunities whilst peaks arrived at 33x and 22x.
Recessions and Rebounds:
1941-46 trough at p/e of 8, peak of 17
1950-56 trough at p/e 0f 9, breather in 1954, peak of 20 in 1956
1958-67 trough at p/e of 13, climbing to peak of 23 in 1966
1969-73 trough at 15, peak of 19 in 1973
steady fall to 1983 when p/e troughed at 6
1983-87 trough at p/e of 6, peak of 19
1988-1995 trough of p/e 11, peak of 19
1995-1999 temporary rest at 15, (dotcom induced) peak of 27
2002-2004 trough at 17, peak at 21
2004-2008 rangebound volatile between 16 and 17
Mid century the best buy opportunities appeared at 8x, 9x and 13x, whilst late-century they were 6x, 11x and even seen at 15x. The respective peaks hit at 17x, 20x, 23x mid-century whilst seen again at 19x, 19x, 27x late century.
But what is also of importance was the range-bound effect of western bourses between 2004 to 2008 as they remained static (so demonstrating continued value) even as the EM markets comparitively surged.
Thus during the early part of the 21st century a p/e of 16x and 17x was paid for what appeared comparitively lacklustre but critically important solid and stable companies versus their more exotic foreign counterparts. So by historical terms, a relatively high price consistantly paid equivelent to what had previously been a sell signal just after WW2, that 16x price seemingly set after it represented the low in 2002 after the dotcom crash.
Hence momentary and indeed long-term measures, CAPE or otherwise, are wholly contextual and must be seen to be so.

Value is Cyclically, Regionally and Globally Relative -
Without seeking to under-mine Shiller CAPE – itself useful in its consitancy – surely a more meaningful ability to assess both the engines of commercial growth – and so in turn economic growth – aswell as market interpretation and reaction would prove vitally useful. Something which incorporates a greater contextual picture.
This no doubt is a hard task, hence the reliance upon age old models, but vitally necessary nearly a 100 years on.
Whilst the 2007/8 crash was very destructive, it also re-set perspection, investors seeing p/e of 12 as the new value-level re-entry point, with thereafter 17 appearing 'fair value' given its rangeboundness in 2010/11 assisted by QE, yet also still awaiting the expected positivity fof fundamental economic traction.
It must be agreed by all that US stocks look presently "full", but also recognised that institutional investors will be awaiting for the US economy to drive revenue, EBITDA and EPS levels and so draw-down the respective p/e values as the top and bottom lines respectively increase.
As stated on previous occaissions by investment-auto-motives, whilst conservative value measures (as indeed used in 'Coupled Ratios') set a historical constant, in the first phases of an economic upturn long-term investors are willing to momentarily paid “over the odds” recognising inherent value and awaiting the return of corporate earnings power. The greater the expectation the higher the price paid.
That appears to be the case today with the recognition that post 2008 those first stages of said economic rebound have been very, very drawn-out. Creating both severe societal pain, but also more beneficially, what may prove to be perhaps the best long-term investment opportunity for many decades if not centuries, so promising a new 're-built' era of sustained economic health constructed upon not only a better balanced economic platform but also conveying the need for a more pragmatic approach to investing.

The USA vs the RoW -
The US Fed realises that it must maintain its off-seting “tapering” policy, retracting QE support in a measured and balanced manner relative to the data indicators of returning US growth. But the US sits in a very different international context to that of the last century. Whereby the US is a natural investment hub for the wealth of what are now far richer foreign interests: corporate, governmental and private. Thus the created wealth and higher liquidity generated between 1995 and 2010 and held by foreign hands has and will continue to variously seek investment opportunities and safe-havens.
This wealth effect on its domestic bourses and city-centre property) was formerly seen in Japan before its mid 1990s decline, with even after the onset of economic stagnation, the wealth of the influential Mrs Watanabe's maintained high domestic P/E levels simply in search of marginal returns. Added to this is have been the former mega-highs (30x plus) benchmarks set during the meteoric rise of China.
Hence even the very notion of “value” has shifted given the broader set of multi-type investors which now inhabit the investment universe; albeit their own investment routes presently typically regionally restricted. But as bourses continue to merge so access improves.
Nevertheless, here and now their are – at an averaged surface level – real discrepancies between various Western and many prime EM markets.
A global comparison of nominal (not CAPE) P/Es follow:
(As of 13th January 2014)
USA: 19.6x
Canada: 18.6x
Mexico: 21.3x
UK: 14.5x
Ireland 21.6x
France: 18.8x
Germany: 16x
Norway: 13.7x
Netherlands: 17.5x
Switzerland: 19.8x
Spain: 20x
Italy: 20.7x
Poland: 12.1x
Hungary: 16x
Greece: 2.3x
Cyprus (South): 37.5x
Turkey: 8.4x
Russia: 5.6x
India: 15.1x
Pakistan: 12.9x
Malaysia: 17.2x
Singapore: 12.7x
China: 6.8x
Australia: 18.1x
Argentina: 4.3x
Brazil: 13.4x
Colombia: 14x
[NB the obvious real anomolie here is Southern Cyprus, which at 37.5x appears comparitively heavily over-bloated. This probably a reflects a retained store of wealth by foreign interests, as undoubtedly noted by Brussels, which will seep back into mainland Greece, Russia and probably 'invisible' places such as Cuba as it continues to slowly transform].
However, beyond the stated measures, the issue of real importance is at which stage of their respective economic cycles each country and region sits, the exposure of domestic corporations therein and of course the performance and structure of their individual businesses.
Though plainly without such deep analysis, there appear to be “bargain markets” and no doubt within these “bargain stocks”, across various EM countries
But to state again, all is relative.

Western vs EM Perceptions of 'Basement Value' -
Given that the financial crisis trough saw an average 'basement value' P/E rated at 12x (in line with the trough valuations of 1958 and 1988) just like that mid-century 'basement re-rating', it can be plausibly argued that in the West that the very notion of low P/E valuation levels have fundamentally shifted; even though they have appeared in certain EM markets.
The noted differential between Russia's 5.6x and China's 6.8x versus Brazil's 13.4x and India's 15.1x, highlights the prime difference between what are still effectively narrow commodity and export dependend economies versus those which have greater balance, both regards domestic and export consumption and the breadth of commercial activities.
Recognising this difference the once previous idea of comparitive BRIC valuations is redundant. Morer likely the higher valuations given even in lean times pre-empting the awaited economic rebound.
Presently, Brazil and India are far more 'valuation aligned' with the likes of the UK
This may also be partly affected by EM investor perceptions of what constitutes a 'bargain value' in notionally advanced countries, with greater liquidity and less reactionary buying and selling, the inverse of what was previously seen in EM markets.
Furthermore, given the EM boom of the 2000s, it seems likely that the managers of large EM funds (SWFs etc) were ready and waiting to switch from over-heating domestic and regional EM bourses toward cooled Western bourses, so providing that 12x floor.
Thus unlike many of the periods throughout the 20th century, when 'basements' were rated at mid single digit figures, the new 21st century western floor was greatly re-rated thanks to the influences of the post-dotcom pick-up and global fund flows.

Await the Earnings Catch-Up -
Given this very broad perspective it appears that if the US and western economies maintain their respective and gradual economic improvements, which is the expectation without any major external shock, then stock prices nearer 20x will dip and those at 15x or so track sideways in a rangebound manner, that action allowing corporate revenues, EBITDA and EPS to grow whilst gradually lowering the actual nominal P/E values.
Of course during such a 'breather' period those companies which presently see flagrantly over-extended stock prices will rightly experience necessary corrections so as to regain re-investment credibility.

The US Cross-Sector P/E 'Spread' -
Yet for the USA, although the CAPE ratio is over 20x and nominal average about 19x, this high valuation is also a consequence of the greater Frankenstein nature of the NYSE; and it must be noted that these are only calculated averages, nothing more.
And of course different commercial sectors typically see different investor treatments of different companies within. relative to different investor types, perceptions and return needs/expectations.
Hence disparity is seen even amongst the heartland of US consumption, with the retail giants Wall-Mart and CostCo showing differing valuations: 14.6x vs 25x, though the latter one-fifth the former's MktCap, and Target Group on 16x, though 20% smaller than CostCo, demonstrating that smaller size and so expected growth does not automatically bring higher P/E.

The Here and Now -
So the more sophisticated investors mayy feel they have extracted full short-term value and re-appear as improved corporate data and so balance sheets draw them back in; as individual stocks themselves reach price trend floors.
Thereby providing new overall market impetus in recognition of the US's, North America's and possibly NAFTA's still broadly under-utilised and substantial productivity components of cash, commercial facilities and labour
Such a temporarily 'sideways' USA outcome will then mean that a portion of that money seeking better returns will be re-circulated into the UK and Europe – still at 60% or so of historical norms (if presumably all stays well); and notably toward specific company opportunies amongst those best under-valued and healing EM economies.
Whilst the appearance of sideways trending being seen as a disadvantage to various investors, logic supports the reasoning that institutional funds (whose balance sheets are re-boosted from pension contributions of a revitalised labour-force) will stay closely aligned to Western bourses, whilst hedge funds etc will seek-out opportunities across those under-valued BRIC, CIVETS and new 'Pioneer' markets.

This then sets the scene for continued economic steadiness in the West, no doubt with specific sector rotation as brokers advise clients to switch from temporarily over-valued companies to temporarily under-valued sectors and firms

The Broad American Auto-Sector -

The following provides a momentary P/E snap-shot of the various constituents:

Major Manufacturers:

GM : 16.75
Ford : 11.8
FIAT* (Chrysler) : 24.8

Whilst obviously not notionally 'American owned' it does gain much of its present income from NA and will undoubtedly have a large American share-holder interest.

European and Japanese VMs

VW : 11.29
BMW : 10.65
Daimler : 9.51
Renault : 17
Peugeot : n/a
Toyota : 10.5
Honda : 14.3

Thus we see that great variation amongst the 'American' firms and amongst the Triad's auto-producers.

To aid comparisons, following are those US listed suppliers.

Automotive Suppliers:

American Axle : 4.18
BorgWarner : 21.6
Cooper Tire : 6.7
Dana Corp : 105
Delphi Automotive : 18.66
Eaton Corp : 22.2
Goodyear Tire: 16.66 (NASDAQ)
Johnson Controls : 30
Lear Corp : 5.79
Magna International : 13.6
Meritor Inc : 25.9 (est)
Tenneco Inc : 21.5
TRW Automotive Holdings : 9.2
Tower International : 11 (est)
Visteon Corporation : 20.5

To set a yet broader tone, the following firms could be viewed as medium-term entrants into mass personal mobility sector, so competing against a portion of the city-car / sub-compact car 'share of mind', given their multiple variant off-road buggy offerings.

Potential Entrants* -

Arctic Cat : 18.55 (NASDAQ)
Polaris Industries : 27.8
(John) Deere and Co: 9.8

(*based on the precept of small buggy-like 'Neighbourhood Vehicles' [or 'NV's'] which have more limited performance and regulatory boundaries, but seen as an increasingly powerful cost-saving and eco-alternative to a family's 2nd or 3rd car, and oft used by Sunbelt pensioners).

Given the broadened context of US Autos, the inclusion of recent 'disruptive' entrants is obviously required.

“Sector Disruptive”

Tesla Motors: 270 (est)

Synopsis -

Thus we see a wide P/E difference between the American auto-producers, GM 'riding high', FIAT-Chrysler more highly rated still (well above the sector norms) awaiting new revenues streams from elsewhere effecting a reduction in the current P/E premium; and Ford having seen a 'breather' on its rebound.

For the most part, the Supplier sector has obviously seen fortuitous stock-price growth aligned to the expansion of the NA vehicle markets, yet as seen, given more constituents of varying vehicle systems core competence, there is yet wider P/E variability; their valuations dependent upon business model strength – the more 'smokestack' orientated (and so exposed to EM competitors) the less favoured – along with the obvious factor of balance sheet strength. As seen with Cooper' s failed Indian acquisition attempt to expand reach and reduce costs, the less favoured forced to try to re-invent themselves; either expectantly (as seen) or more radically, along the lines of Germany's Continental AG, which leaped-up the value-ladder into chassis control systems and travel-tracking instruments. 

Of additional long-term interest are those off-road utility, leisure and sports vehicles which grew favour in farming communities from Quad-bikes onward, to become ever more able, powerful and comfortable alternatives both off and on road. This alongside the growth of 'neighbourhood vehicles' (presently largely EVs). Both sub-sets should merge with both ICE and EV power. The dual participant of these trends has been Polaris Industries so under-pinning what presently seems a 'peaky' rating, though based on an efficient re-branding and on-seller business platform from a quality source. Arctic Cat and Deere and Co are seen as otherwise diluted by their less efficient models, respectively offering ATV associated merchandise and exposed to what has been a trough in heavy-segment agricultural equipment sales and slack in private and municipal ground-work sales. Yet in the longer-term, all 3 could potentially gain new segment 'road-buggy' product sales given what may be favourable state transport planning policies for lower speed city traffic.

As regards Tesla, it did indeed absorb the failed Fisker Cars to retain itself as the sole luxury-sports EV, and reports 20,000 sales to date of its original sportscar and later sedan now assembled in what was the ex GM-Toyota NUMMI plant in Fremont, California. However, at was was 6 months ago a built rate of 3-5 days per car relative to a conventional car plant, capacity seems restricted by build process, using five methods of structural fusion versus the fewer in 'designed for manufacture' aluminium bodies such as that at JLR. Though flexi-task robots greatly assist. Tesla has certainly impressively progressed in its product and plant roll-out. But, besides the overtly optimistic stories regards battery-tech performance vs range vs longevity (super-charge vs trickle) greater headwinds are now faced with what will be reduced conventional energy costs within the US (via gas 'fracking' and domestic oil drilling) and little or no federal eco-subsidies, though not needed at present MktCap rates. So now seemingly with 'professionalised' in aluminium industrial technique, Tesla could just as easily sell-off its advanced plant back to GM, or to Ford or FIAT-Chrysler [esp given ;Fre(e)mont connection], (or another) given that arguably its mid-scale 'lightweight body-structure' factory is arguably the real asset; part paid-for by the US population directly and indirectly. Tesla perhaps then able to replay what it has done in the US in another countries offering governmental eco-subsidies. Impressive achievement to date given innate sector caution, but whether really a 21st century alternative power car-company, or 're-play' venture-firm remains unclear. As such, it seems an intentionally designed 'multi-stage rocket'business model, a real enigma, so harder to objectively gauge, as does its present extreme P/E valuation rating.    

Thus overall for the US automotive sector, variously interesting multi-point P/E levels, much dependent on company specific tailwinds and headwinds.


At low 20sx trailing CAPE earnings and notionally 16x estimated notional earnings it is recognised by some that shares are near and indeed well over their average over the last 30 years. Whilst others state that from an actual time-based measure the average actually stands at 13x forward earnings, so well below some ratings today.

But it is perhaps far better not to seek out the average, but instead more historically representative case-study periods. That is to say the rate of P/E climb during what have been post heavy depression and heavy recessionary rebounds. This then creates a far more “apples for apples” approach as opposed to the oft seen “apples for pears” approach.

Most of those rational capital markets' participants who have invested in western stock markets, and especially the Standard and poor's 500, should well recognise that after the massive fourfold valuations rise since 2nd March 2009 to date (683 to 1,838) what is of importance was the nature of that rise. A five year chart shows that though on a historical basis it seems to mimic the rapid growth of previous bubble markets, and has surpassed their peaks, it has in fact been a generally steady rate of growth over those 5 years.

More over, whilst the climb rate on a 75 year chart appears very similar to the dotcom boom and subsequent failure and the re-climb between 2003 and 2008 ending in the financial crisis crash, today it appears that for the most part a necessarily more rational approach has gained favour. One far more suspicious of possible 'snake-oil' boom and bust schemes (such as the almost mythical BitCoin).

And importantly, given that much is based on liquidity and associated credit, the central banks QE efforts have injected huge amounts of liquidity into the USA. Thus whereas the financial crisis was born out of what was effectively CDO based (faked) 'soft-credit, today commercial and home loans are drawn from what may be described as 'hard-credit'.

So whilst the market appears on surface inspection to be a similar dynamic to that of the onerous past, an objective viewpoint states otherwise.

On this simple observable assumption it seems rational to presume that mid and long-term investors will simply wait for corporate earnings from B2B (now including SME's) and B2C sources to improve on the back of the continued upturn in the economic cycle.

Yes, in a manner similar to 2003 onward, but now seemingly largely abhorrent of irrational speculative excess (though a few supposedly "visionary" companies do appear to stand-out) and at governmental policy-level, overtly aware of self-serving financial machination with presumably greater checks and balances beneath what appear relaxing strictures.

Remember, from an economic perspective the west presently still lives in 'extra-ordinary times' even as normality slowly returns, but as it does so it provides what may prove to be conducive conditions for a very necessary long-term investment mentality within the United States of America. 

One which recaptures the very roots of American enterprise and its original 'puritanical pilgrim' societal ideals.

Friday, 3 January 2014

Company Focus – FIAT SpA – New Year Cheer from Milan, Wall Street and Beyond.

The obvious immediate New Year impact for the auto-industry has been FIAT's agreement with the UAW labour-force VEBA to acquire the remaining 41.46% of Chrysler LLC from the UAW's VEBA Trust. At $4.5bn the price appears an amenable level for management, union workers, and FIAT investors. As well reported it includes $3.65bn for the direct stake plus the $700m of latter-day 'top-up' incentives for union workers over the next four years.
Though from an investor's standpoint, the chatter about FIAT possibly using a new share issuance to raise the funds was always dubious, if not an outright red-herring, given the size of FIAT's E17.48bn cash-store, able to absorb the transaction and against a background of corporate share buy-backs seeking to internalise the full value-addition that is Chrysler. 

The substantial share price rise may be seen as knee-jerk reaction but infact reflects the reality that many investor types have been long awaiting the positive news as their buy-in confirmation moment since it provides FIAT with immediate access to the remaining higher margin income generated by Chrysler's full size Ram pick-up trucks and newer Jeep models.
This so, but as for immediate cost-savings on cross-operational synergies, much of the “low hanging fruit” has already been achieved as seen with the Italian originated Dodge Dart platform and the meshing of Chrysler-Lancia, and indeed in much smaller other ways such as Viper being re-cast in a pseudo-Maserati manner. But importantly the mid-size and large cars business case still remains a partial quandry as Marchionne pushes for badge engineering followed by systems sharing. In a world where non-premium large cars face headwinds; the Chinese market no doubt seen as the eventual 'absorbing' solution, alongside revived US municipal, fleet, rental and diminished private markets given X-over popularity.
FIAT then has the boost of US earnings, whilst revenue in a still depressed but improving Europe is set to remain relatively low given the intentional mid-low price band of the overtly prevelent 500 range; the Panda and Latin American Nuvo Uno; higher sales volumes for each model intended to off-set their inherent price ceilings. 

Though with what are now well amortised Ford and GM JV platform-bases, with 'only' derivative model tooling impacting CapEx, per unit margins should be much improved as variants are introduced (esp 500L's Trekking, 7-seater Living and 500X cross-over). Sales will be assisted by a natural consumer through-flow as singles and couples exit the 3-door city-car and grow with small families into the 500L mini-MPV;  likewise an aging European population seeking 'compact practicality'. Furthermore, the oft forgotten but 'early cycle' importance of its light commercial vehicles (LCV) range, likewise will be seen as overall EU business sentiment rises (as seen in PMI figures); the smaller vans similarly derived from the small-car platform(s).
But much remains to be proven by over the mid and long-term. The Italian group must retain leadership in a more heavily competitive Brazil, and as an adjunct to this create a truly viable strategy for the established and newer EM regions. (Though here FIAT does have historical advantages here for E. Europe, the Caucases, Turkey and MENA. Perhaps importantly (the then AMC) Jeep was the first western nameplate in China, but how this might be leveraged is unclear, but heralds much promise, though expansion of its JV with China's GAC Group (which produces the Viaggio compact-mid size sedan).
So most critically a tenable overall global strategy which ideally re-introduces the FIAT badge into the US someday after Ferrari, '500', Abarth and later Alfa Romeo, to a receptive audience; which itself relies upon FIAT's stewardship and success with Chrysler, Dodge-Ram, Viper. Mo-par etc
The FIAT-Chrysler consolidation steps are now successfully completed and it seems to have created a unified internal culture (unlike Daimler-Chrysler previously) thanks largely to the unifying impact of 2008 crisis. It has now created a new potentially high-power (6m unit) production engine with multi-billion dollar liquidity reserves; so industrially and financially strong. But that strength must be well directed and not allowed to possibly fracture as Chrysler seniors improve its own intra-company standing.  
As well recognised, FIAT SpA must now create and re-create: the critical corporate components of its: steering (product strategy), accelerator (brands strategy), transmission systems (retail channels), wheel grip (advertising) and attuned 'bolt-on' accessories (after-market services and affiliations). Thus overall public and industry perception (corporate persona).
Yet as of today, the shape of the here and now, and the shape of the immediate future appears healthy. And even if the 16% or so jump appears instinctively over-bought – as some take profits – the FIAT share will soon find its new and fundamentally steady floor, as Chrysler's sustaining income for the parent group is met with its own steadily improving European and RoW revenue and profits.

Post Script
It is little known that during the midst of the 2008-9 whirlwind Bob Lutz presented the idea that GM should acquire Chrysler to GM's directors. Wisely, the BoD negated the idea, given the problems GM already faced internally, and the inevitable shock to US vehicle buyers.
A merging of GM-Chrysler would have undoubtedly given massive near-term cost savings but would have no doubt run into anti-competition regulatory problems, and critically heavily degraded both marques credibility. Both would have seen a raft of brand-loyal US buyers (especially for important pick-up trucks) wholly disgruntled giving advantage to Ford, Toyota and Nissan.
[NB Though investment-auto-motives still maintains the idiom of the multi-company created All-American HD 'COTS' truck for specialist Military needs].
So, from a global perspective, FIAT's purchase of Chrysler has been the correct route forward from that period of 'creative destruction', yet finding the right internationalist approach for promoting 'Global FIAT' will be vital to release the potential.