Thursday, 14 May 2015

Companies Focus – Global 11 Auto-makers – “Coupled Ratios” Analysis: Q1 2015

Conspicuous by its absence, investment-auto-motives intentionally chose not to provide “coupled ratios” positional analysis for the Q4 2014.

By YE 2014 it was recognised that the powerful effects of the ECB's QE actions, very much required for the Euro-zone's real-economy revival, would inevitably induce the inevitable share-price boost effect; as both newly released € denominated liquidity and portions of global liquidity sought "easy-money'' returns with the possibility of indiscriminate 'chart chasing'.

Since 6 of the 11 global auto-makers are effectively housed in Europe, with the majority of these with heavy vehicle sales bias within Europe, it was inevitable that as consumer cyclicals at least some of these companies MarketCap valuations would be temporarily artificially effected by the QE. This obviously recognised by the broader capital markets, yet creating the possibility of a greater correction if European sales and margins (together with harder landing in China than supposed) do not meet mid-term 'new norm' revenue expectations.

James Mackintosh of the FT recently highlighted the fact that amongst the various sectors it was European car-makers which rode the greatest QE uplift.

Post-peak decline has since induced, as speculatively driven profits have been taken by certain investment (ie trading) factions, as the likelihood of extensive month on month ECB bond-buying is considered to become unlikely. With this a notional renewed rationality should become apparent. However, the ECB has stated that 'Draghi's Put' will be applied as necessary over the full term, this possibly central bank double-speak to induce the capital market's led recovery so seeing earlier tapering-off, which is the interpretation investors and traders appear to currently have given the 'good news' growth stories out of certain EU countries.

However, any such stalling of growth will inevitably demand continued QE. With such real-economy withdrawls and counter-acting medicinal cash injections will likely come share price volatility; enjoyed by traders and even some CFOs (offering buy-back propositions), but frustrating for the long-term value investor. 

“Coupled Ratios” Analysis -

As is now well engrained, 'Coupled Ratios' was formulated to pictorially coalesce the most popularly deployed investment measures across the four primary investment considerations.
The critical graphical element – depicting 'cartesian co-ordinates' - provides a far more easily digested interpretation of the overall statistical backdrop.

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.

It must be stated and re-stated that although far more definitive in its own right as a contributive intellectual tool, the fact is that “Coupled Ratios” Analysis must be utilised in addition to investment reality and sentiment regards individual auto-maker's exposure to macro-economic global and regional tailwinds / headwinds, aswell as distinct micro-level influences at market-sector, sub-sector and critically at individual company level.

Q1 2015 Positioning -

Given the intentional absence of a YE2014 depiction, the graphic starts afresh.

Market Valuation Ratios -

Even within this QE boost period, in order to maintain cold rationality beyond the immediate market peak, the frame of the 'investment window' remains unaltered.

Wholly within the lower portion of the window is Hyundai, with VW (having been higher) now positioned well within the top-right outer boundary, whilst Honda and Renault are respectively seen to be near and at the upper-most boundary.

In this regard each must be viewed for its investment standing,

Hyundai recognised as having previously gained sales during the after-effect of the Western financial crisis on its competitors, now facing a combination of counter-acting boosted western vs slowed EM global sales and need for sizable CapEx.
Somewhat Similarly,Volkswagen's internal board-level ructions (Piëch and Winterkorn) have at least brought about a sense of strategic reconsideration and moderation of share-price and so P/E (this fortuitous to institutional investors). It must battle slowed sales in critical China, the need to far better attract the USA market toward the VW brand and the requirement for a new low-cost global car - the toppling of the Gol in Brazil perhaps a wake-up call,. To this end, although momentarily fallen upon his sword, though still with major influence, Piëch has been wholly right.
Honda has been highly consistent / static in its position, this very possibly well managed by Honda's executives so as to maintain an investment attraction. However, it has faced hurdles over the past year or so as its own internally created problems (ie product quality) have sapped the positive 'export effect' of looser Yen policy. Critical has been its loss of strong market grip over the years on the small-medium sized cross-over segment (ie C-RV), encroachment on Accord sedan in the USA and the now ageing yet still practical sub-compact Jazz.
Renault's P/E obviously much boosted by the QE-effect, but also recognised as offering a strong target market line-up of vehicles in the all important European B/C segment (hatchbacks and Cross-Overs) aswell as gaining from the upswing in commercial vehicle fleet sales as the business cycle improves.

Beyond yet close to the outer-boundary (top-right) is GM and Toyota.

Toyota has been fortunate enough to ride an Abenomics induced tailwind that has had great effect in the USA and China, which along with its conservative common-sense range, perception of dependability, and the broadened hybrid portfolio has ticked many consumer boxes; the renewed demand effect in the USA together with the Yen's weakening and Honda's loss of market momentum providing thus far a perfect storm.

Toyota, as with BMW and Daimler closeby, sits below the P/E denomination line but beyond the P/B line. The higher P/B typically reflects investors' positive sentiment, thus must be viewed in their own merits, eg Daimler's conglomerate nature and very positive car sales, and BMW's future product pipeline.

Ford likewise sits far to the right, demonstrating high P/B, well beyond the conservative investment window, whilst FCA Group sits high on the P/E scale. Each demonstrating respective investor perceptions of: for Ford the confluence of the USA's economic confidence and its effect upon new F-series sales and unit margins; whilst for FIAT belief that slowed N. American sales income will be complimented by Italy's economic rebound (mirroring Spain's) and thereafter South America, the impact of improved margins available from the expansion of the 500 range with 'L' and 'X', even if unconvinced about aspects of FCA's long-term global brand strategy story.

Peugeot (PSA) presently remains very much an outlier, its estimated high P/E value partly attributed to the 'backstop' equity interests of French and Chinese governments – who themselves may have prompted heavy institutional buying with likewise long term horizons for Europe and China. Similarly, those who are willing to notionally 'over-pay' in advance of France's economic improvement, car range renewal, the new Europe-wide demand for its core competence in small to maxi-medium sized vans; and the likelihood of trade re-opening with Iranian VMs and OEMs.

But critically, after the QE price boost and “momentum-buying”, much depends upon the consumer take-up in Europe for new vehicles, this itself assisted by car-makers' operating as both product retailers and finance houses with then greater flexibility in sales and financing functions.

Profitability Ratios -

Within the investment window it is the Koreans and Japanese that presently hold greatest sway, with Hyundai still consistently leading, and Toyota now taking a strong second place thanks to previously mention attributes. BMW maintains its solid position, whilst Daimler has been seen to climb markedly over the preceding 4 quarters or so thanks largely to its car division. VW stays within the window, albeit at a lower level because of the changed earnings dynamics for the VW brand in China.

Nudging the lower boundary is Renault, having slowly improved profitability and so incremental movement toward this demarkation line over the preceding 12 months.

Conversley, previously on the lower boundary and awaiting entry, Honda has lost profitability in the face of reduced domestic cars sales, static global vehicle and power-products volumes, marginally better motorcycles, but increased COGS and recall/warranty impacts. Thus in Q1 lost part of the ground previously made and sits mid-stream below the window.

Closeby GM and Ford sit together, the former's previous progress slowed by massive vehicle recall costs (in the ignition barrel debacle et al) and now seemingly rebounding (albeit into a slowed yet bigger US marketplace and TIV), whilst Ford has thus far been slowed somewhat by domestic and Chinese CapEx demands (such as the Kansas truck facility) and the greater comparative impact of international divisional losses (Europe, S.America, Russia) on its strong domestic income stream.

FCA Group now sits just above the break-even point.

Liquidity Ratios -

The Abenomics boost has done much to provide Toyota with a prenetly unassailable liquidity position as regards its Operational Cash Flow Ratio; thus it sits centrally within the investment window.

Others including Daimler, BMW, Ford and VW have balanced improved sales with Capital Expenditure and Research-Development cost demands to provide an increasingly convincing latter-day story regards cash generation and cash conservation and thus working capital flexibility.

GM has remained virtually static outside the window with a lower OCF Ratio, this measure perhaps less of an issue for the company given its “fortress balance sheet”, though set to improve after the last of the extra-ordinary recall costs have been met.

Honda has slipped to near investment window status in Q3 2014 to just about in positive OCF ratio territory.

In the negative realm, Renault and Hyundai remain static to where each was six months ago, whilst FCA is estimated to have improved. The greatest shifts however involves Peugeot, six months ago demonstrating its OCF worth, today's position very different.

[NB an absence of directly reported Current Liabilities data from both FCA Group and Honda has necessitated estimations regards Operational Cash Flow standing]

Debt Ratios -

There has been general improvement of Cash vs Debt levels for most automakers as improved revenues, EBIT and PaT have allowed companies to pay down their various forms of loans.

GM, FCA and Hyundai remain within the 1:2 segment, as they were previously, but with improved cash cushions. Peugeot appears to have directed a portion of its OCF toward cash preservation,with its improved standing on the lower 1:2 segment boundary.

Renault appears unchanged over the last six months, sat on the lower 1:3 boundary.
Toyota shows improvement by progressing into the 1:3 section, having been formerly lower upon the 1:4 line.

Within the 1:4 segment are Ford and VW, both using the present low cost of capital environment to grow borrowing serviced by improved revenues.

Just beyond the investment window is Honda, as was previously, with also BMW and Daimler further out. BMW has remained somewhat static with slight debt increase, whilst Daimler has used net income to boost cash position and similarly deploy the favourable borrowing environment to marginally increase debt.

Results -

The theoretical investment case per auto-maker is judged by the number of 'appearances' it shows across all four investment categories.

Four Appearances:
- Volkswagen

Three Appearances:
- Toyota (with nearly 4 appearances)
- Hyundai

Two Appearances:
- Renault (with nearly 3 appearances)
- Daimler
- Ford

One Appearance:
- General Motors (with nearly 2 appearances)
- Honda (with nearly 2 appearances)
- FCA Group
- Peugeot (PSA)

Conclusion -

The depicted graphs represent data gleaned from the merged and matched data sets taken from corporate accounts, investor presentations and when necessary independently reported statistics (as necessary substitutes). The outcome obviously seeks to highlight the logical, theoretical investment attractiveness of each of the global eleven players, utilising Q1 results and recent (13.05.2015) stock prices.

Accompanying what appears a general decline in macro-economic policy interventionism by central banks and governments, is the obvious speculative ability to instinctively gauge investment value. Whilst certain regions, markets, asset classes and sectors will be reactive to event-driven news, as the west slowly normalises, so increasingly, the old fashioned 'fundamentals' and 'value' approach to investment – far broader and far deeper in 'top-down' and 'bottom-up' analysis – comes into its own; even in this highly algorithmic, technically led trading age.

Thus making distinctive tools such as “Coupled Ratios” Analysis more useful than ever.

Technologically, ever more machines can and will continue to be programmed to survey ever greater swathes companies' valuation metrics as the core of arbitrage speculation, and likewise from the people-led marketing angle, IPO book-runners and brokers will continue to hype-up the prospects for client companies about to publicly list or perhaps chose equity financing over debt ...”plus ça change, plus c'est la même chose”.

What will not change is the absorbed and obsessive investor attitude that seeks to amass from the great swirl of information – both quantitative (as per “coupled ratios”) and qualitative – the sound investment story which ultimately alters the broader market's investment perception and the basis of company fundamentals, so as to provide 'quick-fire', medium-term and far-horizon investment returns.