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'.
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.
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.
NB.
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)
-
BMW
-
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.
