A detailed yet still
simplistic assessment methodology created by investment-auto-motives, which
seeks to bridge the gap between the necessarily procedural and complex
intelligence gathering of sell-side and buy-side analysts within the
professional realm, and the oft limited appreciation of fundamentals analysis
by the all too often indiscriminate private investor, who typically relies to a
great extent upon belated news-stream information and/or (accumulated
sub-conscious) instinct.
Application -
Having initially
demonstrated the approach in June this year, with the prominent use of four
distinct graphs - spanning a) Market Valuation Ratios, b) Profitability Ratios,
c) Liquidity Ratios, and d) Debt Ratios – the intent of the last web-log was to
illustrate how those VMs identified as theoretically ‘best positioned’ from
that quantitative data, did indeed out-perform their auto-sector peers.
As seen, those were
prominently: VW Group and Hyundai Motor, with relatively impressive share price
rises over a very dour 6 month period for the sector, whilst an identified
Renault saw limited share price damage compared to its international
contemporaries.
Noted in the last web-log
was FIAT SpA’s impressive valuation retention, thanks to both rebounding
Chrysler sales within its N.A. home market and capital market sentiment buoyed
by the ECB’s “backstop” QE announcement; so benefiting from dual tailwinds.
FIAT-Chrysler's 'off-set' business model, and the assistance of US and European
intervention, largely contrasting the fortunes of the 'recovering Japanese' and
still 'domestic-centric French'.
March to
September -
General sector share price
loss over this period was represented by an influx of negative readings within
the bar chart, and manifestly described a dearth of market confidence in most
auto-makers: all except for the few with a balanced global sales presence, the
strongest of fundamentals and a fortunate mid-Atlantic centre of gravity.
For much of those six months
most of the Global 11 automakers were still experiencing the aftermath of heavy
physical and metaphorical storms, and whilst seeking to ready themselves for an
eventual return to notional normality, were still highly cautious about
over-promising to investors given the on-going ‘choppiness’ of the global
economy.
Looking Forward -
This web-log seeks to
revisit and re-deploy the ‘Coupled Ratios’ assessment method, by way of an
updating of the four prime indicator graphs, and their respective ‘investment
windows’, which provide an easy-read comparison between each VM.
The four established graphs
displays both the previous Q1 position of each 'Global 11 VM' and each VM's
present position using data obtained from various sources.
[NB. These are Capital IQ,
Bloomberg, auto-makers' own IR reports, and where wholly unavailable modelled
from previous H1 2012 data. It must be recognised that for obvious reasons the
executives of various auto-makers have intentionally chosen to provide reduced
levels of Q3 financial data where viewed as damaging, to even-out presented EoY
performance over a cautious Q4, and for those best positioned to possibly
provide for a positive FY2012 perceptional boost].
Findings -
These are presented in the
established VM order of American, European, Japanese and Korean.
For the duration of this
web-log, the accompanying respective chart (see top right) indicates both the
previous Q1 position (company name) and the new Q3 based position (coloured
roundel). Arrows of varying length show interim movement that has occurred.
Where there has been no discernible movement the company name is shown with
static symbols to either side.
Market Valuation Ratios:
GM (light blue) now sits at
a P/E of 9.4 and P/B of 1.2, showing a substantial rise in its P/E rating from
six months ago, as both the N.A. Economy and regional unit sales saw renewed
confidence and traction mid year, boosted by trickle-down of QE liquidity into
swelled credit availability for businesses and consumers.
Ford (dark blue) sits at a
P/E of 8.6 and P/B of 2.1, its P/E raised substantially by much improved N.A.
Earnings, though still marred by investor concerns regards the re-structuring
of its European division, which Ford has since sought to quell with plant
closures.
Volkswagen (grey) sits very
stable with a P/E of 3.2 and P/B of 0.9, its solid positive performance
provided from global footprint and broad vehicle range providing a balance-effect
and immediately translated into an on-trend general share price rise, yet
itself muted by the limited buying behaviour consequential from the
restructuring of many European banks.
BMW (light green) sits at
P/E 0f 9.0 and P/B of 1.4, the former indicator rising slightly as a probable
result of pre-empting improved SME business conditions in the USA which
provides a major sales base, the economic 'soft-landing' in China so
maintaining sales traction with ongoing local factory CapEx and very probably
assisted by domestic German equity buyers (institutional, commercial and
private) buying 'safe' asset-backed, global-reach, and profit-stable German
choices
Daimler (purple) sits at a
P/E of 7.0 and P/B of 0.9, showing a valuation improvement in both measures as
it becomes increasingly recognised that its broad vehicle range - spanning
premium cars, light commercial vehicles, bus and coach and heavy goods vehicles
– provides for a multi-aspect income boost as western economies slowly emerge
from previous stagnation. Institutionals specifically recognising the deep
levels of apparent CapEx Daimler has undertaken during the elongated downturn,
and its efforts to better serve target sizeable small car and small van
markets.
PSA (dark red) now sits at a
P/E of effectively 0 and P/B of 0.1, highlighting its precarious finances, now
seemingly underpinned by a E7bn loan to its finance division, which should feed
liquidity through to both the core business and the consumer base, presumably
to be alternately directed to create a virtuous demand circle. However,
institutional investors seem yet to be convinced by the massive promised
liquidity injection nor the 2015/16 rebound plan, including the GM alliance,
seemingly awaiting a firm improvement in sales and income results.
Renault-Nissan (orange) sits
at a P/E of 6.4 and P/B of 0.4, showing a slight strengthening of both
indicators, very probably as a 'safer bet' consequence of PSA's woes. A
previous valuation strengthening was seen during the period of ECB announcement
optimism mid year, but dashed through Q3, now assisted by Nissan's expected
sales improvement in the USA (given the North East's states' replacement effect
from Hurricane Sandy) so buoying income.
FIAT-Chrysler (brown) sits
at a P/E of 23.0 and P/B of 0.45. The former figure ostensibly highlights
expectation of a much improved long-term tomorrow, having seen initially
supportive US sales figures from Chrysler, the strong P/E presently pre-empting
a long-term view of necessary European capacity restructuring and a strong
sales flow ultimately derived from an increasingly synergised North America,
South America and Europe, with the potential of an eventually expanded Eurozone
market via western re-strengthening and new sales from commodities economies to
the east of the Balkans.
Toyota (green) sits at a P/E
of 14.8 and a P/B of 1.0, reflecting both a major improvement in earnings over
the last few quarters, so reducing its relative P/E (having been at near 30)
and the typically higher valuation metrics generated by an
institutionally-heavy Japanese stock-market. But also the turnaround and 'new
future' potential of Toyota (inc Lexus, Daihatsu and Hino) given its perceived
massive technology lead with 'real-word' hybrid powertrain eco-tech, plus the expectation
towards eco-intelligent transport and housing, core competences that Toyota has
increasingly sought to weave together in Japan, seeking to export this
capability across the world over the decades to come. So its seemingly high P/E
valuation a result of a still optimistic Japan, domestically orientated local
fund managers and the increasing interests of Asian funds (SWFs etc).
Honda (light red) sits at a
P/E of 14.0 and a P/B of 1.0, with a similar story to Toyota (having been at a
P/E of low 20s). Honda's dominance in motorcycles and domestic power generators
is seen as a natural beneficiary from pan Asian growth, as bottom-tier
consumers aspire to Honda 2-wheelers and new mid-tier consumers seek to aspire
to 4-wheeled Honda vehicles, and power-packs becoming a household staple given
the infrastructure-lag evident in fast growing communities. Thus ever since the
legendary Honda Cub moped, the brand has retained close connection to Asia, but
now must re-position itself vis a vis Toyota and other VMs in the west to
maintain a clear product and eco-tech USP.
Hyundai (mid blue) sits at a
P/E of 1.9 and a P/B of 0.3, and has effectively stayed static on both
measures, a consequence of a positive climb in its GDR's in Europe and parallel
confidence decline in the S.Korean KOSPI index over the same period; in which
it is of course a major constituent. The emergence of the company's
over-statement of fuel-efficiency figures had a momentary effect on sentiment
but hardly displaces the perception that Hyundai, KIA and Genesis brands have
increasingly strong credibility across the 3 all important regions of
N.America, China and Europe, and will continue to build upon good standing
within EM regions. As stated before, it is the general illiquidity of Hyundai Motor
stock beyond the confines of Soeul and European bank GDR's which surpress broad
market valuation.
Results:
As seen previously the
'investment window' seeks to deploy standardised demarkation lines where
possible and elected demarkation to suit. However, the increasing availability
of central bank enabled wholesale credit through a strengthening western
banking systems prompts a widening of the investment window for Valuation
Ratios. To this end the P/E indicator has been raised to 7.5, whilst the P/B indicator
remains at 1.0; thereby reflecting funding conditions whilst also seeking to
maintain a focus on theoretical 'under-price'.
As seen, the only remaining
previous inhabitants of this window are Volkswagen, Hyundai and Renault (its
P/E rise accompanied by the enlarged window). The markedly risen P/E of FIAT
SpA has catapulted it out of the frame, whilst PSA's marked P/E decline
positions it in the 'bottom-left' corner of near investor obscurity. (The
converse argument being that as an increasingly eco-centric mass-market brand
its strategic core competences and market valuation are diametrically opposed,
so providing a good 'value-buy' story). Whilst previously on the border of the
'investment window' Daimler now sits fundamentally within the frame.
Thus on a valuation basis
the auto-makers identified as most promising are: Volkwagen and Hyundai,
followed by Daimler and Renault.
Profitability Ratios -
GM saw a profitability
decline in Q3, from 5% profit margin and near 20% ROE to 3.8% and 13.2%
respectively; thus falling away from investment window inclusion.
Ford likewise saw its
performance fall even more dramatically from a 17% margin to 5%, with a lesser
proportionate reduction in ROE to 140%, a consequence of the heavy asset-backed
financing previously undertaken and being paid-down. Thus unlike its cross-town
Detroit peer it just about stays within the required metrics.
Volkswagen appears to have
enjoyed a remarkable 23% profit margin for Q3, yet it is a figure that was not
explicitly stated in reporting, possibly arising from a negotiated 'profits
taxation holiday' to support German industry. It will therefore possibly to
provide an EoY surprise for investors, or allow a cushioning of any Q4
under-performance, and critically provides ongoing investment impetus for the
institutional investment community (Germany especially so). Its ROE remained
stable at 32%. This provides a clear boost to its leadership position at this
point in time, though unexpected to be repeated in the near future.
BMW retained its 7% profit
margin whilst seeing a decline in its ROE to 10.8% from near 20%. Thus
Daimler saw its profit
margin reduced to 4.2% from 6% previously, and its ROE fall from 16% to 14.3%,
so re-positioned just outside of the “investment window”.
PSA experienced a profit
margin drop to -1.8% from 1%, and ROE drop to -5.8% from 6%, plainly
highlighting its commercial and industrial concerns.
Renault-Nissan saw a profit
margin fall to 3.8% from 5%, and an ROE fall to 6.9% from 8.5%, its greater
non-EU market exposure via Nissan, Renault and Dacia brands providing the
ability to sit close to but still beyond the investment frame.
FIAT SpA saw a notable
decline in its performance in Q3, with a 1.4% profit margin from a previous 3%
and 10.4% ROE from previous 20%. So propelled yet further from optimal
investment ground; lower than all except the tortured PSA.
Toyota saw its placing
improve, profit margin pulling strongly to 4.8% from approximately 2% and ROE
raised to 8% from about 4%, assisted by the post-Fukushima replacement business
and consumer purchasing, an FX declined Yen and upturn in NA sales.
Honda saw its profit margin
grow but at a far slower pace than Toyota, up by 1% to 4.4%, and its ROE
similarly rise to 7.9% from 6.5%.
Hyundai remained relatively
static but strong with a 9.1% profit margin, down from its 'normative' 10% or
so, and a ROE of 23.75%; spot-lighting its continued investment rational.
Results:
From the all important
profitability perspective, there were clear sets of winners and losers.
Volkswagen, Hyundai, BMW and Ford remained within the investment arena, whilst
Daimler dropped just beyond the fringes.
The Japanese demonstrated an
expected profitability rebound, heading back towards the 'window' whilst the
remaining set, with FIAT stumbling in Q3 and PSA showing obvious heavy
faltering.
Liquidity Ratios -
GM saw its liquidity
substantially contract from a Operating Cash Flow measure of near 0.8 to 0.01,
whilst its Current Ratio shrank slightly to 1.25, highlighting
Ford experienced a heavy
liquidity loss, with Op C-F diminishing from 0.1 to 0.026, whilst driving down
its liabilities to give a Current Ratio of 1.9, theoretically inefficient but
providing a sound re-financing safety net for itself if at all necessary.
Volkswagen shrank its Op C-F
to 0.06 from 0.1, whilst also seeing a reduced Current Ratio from 1.2 to 1.1.;
a portion of the cash-flow possibility directed to bottom-line profit.
BMW saw its Op C-F reduced
to 0.025 from 1.0, and its Current Ratio fall from 1.3 to 1.0.
Daimler stayed effectively
static, with a bare minimum Op C-F of 0.003 and Current Ratio of 1.27.
PSA maintained a Current
Ratio of 1.0 but saw Op C-F distorted to a lowly -0.006.
Renault-Nissan saw its Op
C-F reduced to 0.043, whilst it retained a Current Ratio of 1.0.
FIAT-Chrysler experienced an
Op C-F of 0.05, down from 0.2, and a Current Ratio of 1.4 from 1.6.
Toyota saw its Op C-F
decrease to 0.065 from 0.15, and Current Ratio of 1.0 from a previous 1.2.
Honda had its Op C- fall to
0.024 from 0.18 and its Current Ratio of fall to 1.3 from 1.5
Hyundai Op C-F reduced to
0.046 from 0.13, and Current Ratio swell to 1.6 from 0.8.
Results:
Most auto-makers saw a heavy
cash burn through the Q3 period as vehicle demand tailed-off from previous
period highs, though for the lucky few, some of that Op C-F loss may have been
appropriated toward either inward investment (seemingly so with Daimler) or
toward boosted profits (as appears the case with Volkswagen)
However, no VM appears in
the “investment window”. The closest players being Volkswagen and Toyota, who
are closely jointly placed with 'best-in-class Op C-F of 0.06 and optimal
Current Ratio of 1.0.
Debt Ratios -
GM has a much improved cash
cushion of $37.5 and overall debt position of $113bn (although its highlights a
lower mid-term debt obligation of $43.1bn). This now gives a general overall
measure of 1 : 3 cash to deb, much removed from its previous apparent 1 : 1
position as then calculated.
Ford has cash of $24.1bn and
debt of $26.4 (although states a mid-term obligation of $14.2). An impressive
measure then of 1 : 1.1. This then equates to an apparent major debt reduction
programme and increase in cash reserves.
Volkswagen remains largely
static, showing gross cash of E25.7bn and debt E82.5bn, giving 1 : 3.2
BMW has cash of E13bn and
overall debt of E102bn, thus 1 : 7.8. It saw both cash and debt levels rise by
approximately 30% and 25% respectively
Daimler shows gross cash of
E16.3bn and gross debt of 121.2bn, thus 1 : 7.4
PSA has liquidity of of E11.5
(largely government funded) and debt of E33.76, so 1 : 2.9
Renault-Nissan shows E7.5
cash and E51.3 debt, thus 1 : 6.84
FIAT-Chrysler stays
generally 'in-situ', it has cash of E17.1bn and debt of E26.8bn, thus 1 : 1.56,
a surprisingly good relative position.
Toyota with $39bn cash and
$149 debt shows a major cash influx and slightly reduced debt level; its
measure now 1 : 3.82
Honda remains generally
stable with $12.5bn cash and $51bn debt; thus 1 : 4.
Hyundai stays relatively
static with E13.42 cash and E31.8 debt
Results :
The order of cash to debt
strength within the “investment window” is as follows: Ford best placed, a
surprising FIAT second, Hyundai third, VW fourth, a “bailed-out” PSA fifth,
Toyota sixth and lastly Honda seventh on the fringe.
Conclusion -
Category leaders are seen to be:
Valuation Ratios :
Volkswagen, Hyundai, Renault
Profitability Ratios:
Volkswagen, Hyundai, BMW & Ford / Daimler close to fringe.
Liquidity Ratios: No
absolute leaders / VW and Toyota best placed.
Debt Ratios: Ford, FIAT,
Hyundai, VW, PSA, Toyota & Honda
Consistent Appearance:
Volkswagen (four times) & Hyundai (three times)
The onward positive strides
of Volkswagen Group (now incorporating Porsche) and Hyundai (with conglomerate
leverage and restructuring Korean industrial base) looks set to remain. Still set apart from other
manufacturers regards the all important – and ironically obviously contrasting
– indicators of valuation vs profit.
These 2 players then still
stand head and shoulders above others; but the remainder of the VM pack is slowly improving.
The overall picture of the
short and mid-term future then is not quite as clear-cut as it has been in
recent times. The remaining German companies BMW and Daimler seek to defending
profits and so may close the emerged gap between VW and themselves. The French firms
of Renault and PSA are able to respectively pry 'value seeking' and 'brave
turnaround' investor interest based upon deflated and 'market hammered'
valuations and new liquidity availability. A Japanese resurgence by Toyota and
Honda, assisted by a much weakened Yen provides confidence in their ability to
repatriate the rewards of re-conquered US sales. But they will vie against a
newly invigorated Detroit 'Big 3' with reduced immediate debts and public
favour on-side within what seems a newly confident USA.
All auto-makers perceive
what may be described as cautious optimism for the mid-term global economy and
reduced concerns about an ever-lasting Eurozone drag stalling other regional
economies.
Yet ironically, “outside the
box” of the theorectical “investment window”, it could be FIAT SpA which once
again provides a share price upturn, as possible speculators seek to beat the
crowd so creating a possible self fulfilling pull, the same even possible of
PSA.
But for now the risk averse
will stick to the proven pack leaders and the improving middle pack; with the brave alpha seeking speculator looking to apparent stragglers with turnaround promise.
Post Script -
Whilst TATA Motors is indeed
listed on Indian bourses and the NYSE, and has in recent times provided ever
greater transparency regards sales, income and bottom-line performance of its
Jaguar Land Rover division – itself with global reach – the fact that TATA
badged vehicles do not as of yet enjoy global recognition by the public outside
of India provides the rationale for omitting TATA Motors from the “Global VM”
listing.
As and when TATA seeks to
relinquish a partial sale of JLR via an IPO (on world exchange(s) outside of
India), it will expand the current 11 VMs into a “Global 12”. The recent Credit
Suisse event of 07.11.2012 highlighting the ongoing IR effort, further having
seen an over-subscribed £1bn raised privately in May 2011 via 2018 & 2021
notes targeted at Indian and Asian buyers. However, it must also be stated that
TATA Motors may wish to understandably raise the required JLR expansion capital
by offering fixed income instruments to institutional investors, thereby
avoiding a stock dilution, though those same institutionals may positively seek
a JLR equity holding, given lowered risk-adversity anxiety amongst their own
pension fund trustee clients. Though, the much improved liquidity available in
Western bond markets, still available at low coupon rates, raises the prospect
that a JLR IPO could be some time away, depending upon the growing appearance
of recent “institutional activism”.
