Saturday, 6 September 2014

Companies Focus – The Global 11 Automakers - “Coupled Ratios” Analysis

The previous weblog provided detail of the sizable recent share-price falls for the most of the global eleven auto-makers (akin to many corporations). This auto-sector reaction stemming from a number of causes, including: (primarily) the Euro-centric market response to Ukrainian geo-political unease, partial reaction to Gaza fighting and the tail-off of Japan's own 'Abenomics' boost; whilst one US producer suffered market reaction to problematic operational legacy.

However, of these, it has been the 'European question' that has undoubtedly been most prolific, the previous combination of Germanic locomotive influence together with national-based short-term policy actions to support B2B and B2C consumption, ultimately running out of 'puff' leading to the recent 'dashboard indicators' of renewed economic stagnancy. Overall the previous boost effects of conventional monetary policy proving only short-lived.

Now, as expected, so as to fend-off the very real threat of deflation the “Draghi Put” has been announced. The ECB now set to undertake “unconventional policy”, following the largely successful footsteps of the USA, UK and Japan. This move consisted of the necessary blended effect of reduced base-rate, negative overnight rates for central bank 'cash warehousing' for major banking institutions and most potent, the effective cash injection that is QE via bank bond buying, so lowering yield rates and prompting investors into alternative asset classes; especially equities.

Whilst eventually an expected action by the ECB for an economically weary Europe – itself only part-way through its own necessary yet painful reforms - this is indeed welcome news for a broadly receptive financial audience: across capital markets' dealing desks, for the CFO's of large corporations, SMEs, new entrepreneurs, and eventually for its the trickle-down effect into the mass populace at that is European 'Main Street' at the regional level.

Thus it is precisely now that investment-auto-motives presents the intentionally (slightly) delayed “Coupled Ratio” Analysis.

Q2 2014 Positioning -

As is well recognised, 'Coupled Ratios' was formulated to coalesce the most popularly deployed investment measures across the four primary investment considerations; these being:

- Market Valuation Ratios
- Profitability Ratios
- Liquidity Ratios
- Debt Ratios

The first consists of P/E (price/earnings) vs P/B (price to book value). The second of Profit Margin vs RoE (return on equity). The third of Current Ratio vs Operational Cash-flow Ratio. The fourth of Total Cash vs Total Debt.

Resultant Outcomes -

Market Valuation Ratios:

For the majority of the global eleven auto-makers there has been little effective re-positional movement since the outcome of the first quarter.

The exceptions are PSA moving ever nearer operational break-even, so raising its P/E standing (this not quantified but theorised from more recent price increases over Q2), and Renault which has seen its previously overtly high P/E standing reduced by a mix of profit-taking from previous investors, its P/E still relatively high given the expectancies of both longer-term 'early-bird' stock-holders and latter buyers who recognised the latter-day effect of mid-term price rises as Renault's improved earnings both maintains share price levels but reduced the resultant P/E value, so drawing-in new batches of investors.

However, specifically regards the application of the conservative 'investment window' set by investment-auto-motives, PSA appears to be at long last moving into the very bottom of the frame, whilst Renault whilst now a more price attractive proposition, still sits at a heady P/E; by far the highest of the eleven manufacturers.

Interestingly, all the other VMs sit just 'fully valued' just within or just outside the investment window. All except GM and Ford, which respectively have overtly relatively high P/E and P/B values, a consequence of the present strong vitality of the US economy.

As has been the historical precedent Hyundai sits nearest centre-ground of the window (with its conglomerate discount), with the once closely aligned VW over successive quarters headed continually 'north easterly', now sat more amongst Honda, Toyota and FIAT; with BMW and Daimler on the window border.

Profitability Ratios:

Herein Hyundai, BMW and Toyota respectively sit well within the investment window, hardly moved from their Q1 status, whilst Daimler has slipped slightly in its P/E rating to now become positioned on the border. Likewise are static VW and Honda.

Outside of the frame, Ford improves its standing to head toward the border, seeing improved profit margins but reduced RoE in Q2. GM slips (given its recall problems) whilst Renault improves on both measures in a substantive positive move. FIAT however sees reduced RoE without improved profit margins over the Q2 period.

Liquidity Ratios:

Q2 results saw major shifts in overall liquidity for most auto-makers, only Hyundai, Daimler and Honda remaining virtually static, the former two well within the window, the latter sat on the border.

GM's previous strong standing as a cash generator and storer slipped notably to leave it positioned beyond the frame. Liquidity reductions were also seen at Toyota and BMW, but their previous very strong and strong standings allowed for such movement whilst still retaining investment proposition status.

Interestingly (thru' a tough Q2 in the USA) VW saw its operational cash-flow rise significantly (thanks to retained VW-Audi popularity in 'soft-landing' China) so boosting its strength within the window.
However, the greatest positive shifts came from FIAT and PSA, both previously in negative OCF territory, significantly advanced to respectively just within and well within the investment window. Likewise Ford saw a dramatic shift as the prime US market (and especially F150) generated cash, so much so that Ford moves (happily) beyond the window given its high Current Ratio, awaiting the internal reinvestment of the sums accrued together with debt pay-down.

Renault remains far outside the window, hardly moved demonstrating cash use for new projects CapEx.

Debt Ratio:

An improved cash position for GM, maintaining a stronger stance within the 1:2 (cash to debt) segment.

Hyundai and FIAT remain static on the transition-line between 1:2 and 1:3, so keeping their attractiveness. PSA jumps from previously outside of the window (ie beyond 1:4) to now sit just inside the 1:3 segment, whilst Renault stays static as its slightly less attractive immediate neighbour.

VW slips from the 1:3 border to the 1:4 border, on the edge of the investment window. Virtually static on the 1:4 line are Honda and Ford, whilst Toyota slips slightly with slightly increased debt.

Outside of the window are BMW and Daimler, the latter slipping notably

Results -

As is the norm, investment-auto-motives illustrates the number of 'investment window' appearances for each company.

Four Appearances:
Hyundai (strongly), Toyota (generally strongly), VW (weaker), Honda (weakly).

Three Appearances:
PSA (weakly).

Two Appearances:
BMW (strongly), FIAT (strongly), Daimler (weakly)

One Appearance:
GM (strongly), Renault (strongly), Ford (weakly)

Conclusion -

The depicted graphs, representative of matched and merged data sets, highlight the investment attractiveness of each of the global eleven players, utilising Q2 results and very recent stock price related data.

What is becoming harder to instinctively gauge - so making 'coupled ratios' more useful than ever - is the need to contrast and compare the auto-makers with the best availed global markets exposure. Exposure which encompass the a now nearly “naturally aspirated” US economy (after its own QE injection), and a soon to be 'direct injected' European economy, versus a still very prominent soft-landed China.

All are global players, and all will inevitably gain, but as will be seen, some will gain more so, and the seeds of commercial and investment advantage are plotted herein verses the winds of macro-economic change.