This weblog returns to
the previously established practice of assessing the general
investment attractiveness of the eleven major auto-players
head-quartered in the US, Europe, Japan and S.Korea.
Awaiting European
Traction -
At a time when broad
European economic traction has been questioned once again via the
fragility of Portuguese banks and the reinvigoration speed of the
'TLTRO', it is undoubtedly desired that Germany's win of 'Brazil
2014' will buoy further internal economic confidence amongst
businesses and consumers so as to assist Europe en mass.
Like the Germany vs
Argentina final itself, this process will continue to be drawn-out
given the overall complexities of the situation, ranging from the
need for competitiveness policy reforms to serve sovereign debt
structures, to the need by the European banking system itself to
critically assess the operational and sector-competitive capabilities
of the myriad of large and SME companies.
Whilst the best-run
firms have been self-sustaining from 2008 onward, it seems that the
all too problematic 'zombie' status of many throughout various supply
and value chains will inevitably be eventually subsumed through
merger and acquisitions and asset divestment, when TLTRO and possibly enlarged EU QE measures filter downward.
Stocks As Primary
Instruments -
In the meantime, whilst
awaiting the liquidity feed, equity stake-hold investment
demonstrates itself as the prime economic instigator. In doing so the
black, red and gold colours of the German national flag provides the
appropriate metaphor. Cultural history posits that these colours
represent the journey from darkness, through fire and into light.
An appropriate
philosophical perspective for the necessary strategic and financial
diligence today's raft of equity investors must undertake – from
hedge fund to institutional to privateer. To ensure that the still
relatively constrained levels of valuable liquidity are directed
toward the best prospect companies.
Though the wide
macro-environment still obviously has effect – from 'economic dashboard'
growth indicators to the new unsettling of the Middle East –
continental Europe seeks to reach its own “escape velocity” through relatively conventional fiscal means, so far without a major QE exercise.
The intended by-pass of
such immediate economic pump-priming, which arguably over-serves
financial community interests (and worrisome yesteryear memories),
means that though guilty of creating short-term 'zombification', over
the medium and long-term EU governments seek to create non-inflated
economic conditions, which in turn places the topic of fundamental
corporate valuations high on the re-invigoration agenda.
The Importance of Autos
-
As seen with various
refunding initiatives to date, such as the dual Chinese-French stakes
in PSA, the automotive sector is of immense financial, technical and trade value to
Europe. The sector consists not just of the obvious volume
manufacturers, but a plethora of up-stream tier 1, 2 and 3 generalists and specialists across materials and the wide range of down-stream
entities via distribution, retail and after-sales providers. Additionally, a spectrum of business and product service providers aligned with mass and niche firms, the former including those hi-value research firms 'creating tomorrow', often by translating motor-sport efforts into new mobility endeavours.
Classical Investing
Over Pure Speculation -
Thus, whilst short-term
traders may indeed await and hope that the 'Draghi Put' comes to
fruition, thereby invariably inflating the DAX, CAC and other
national indices, medium and long-term investors such as industrial
holding companies and sector-specific private equity, have been
scouring Europe for potential deals; with multi-fold valuation
methods applied vis a vis situational context.
Beyond the review of
present and past P and L statements, balance sheets and 'cash-book'
statements, such a necessary “company fundamentals” driven
approach spans the four critical areas:
A. Market Valuation
B. Profitability Levels
C. Liquidity Levels
D. Debt Levels
“Coupled Ratios”
Analysis -
As is now well
established, investment-auto-motives' creation of “Coupled Ratios”
Analysis - used for the purpose of analysing the global eleven
auto-makers - provides an immediate snap-shop of each company's
relative health these four critical topics.
Done so via the mating
of the two most popular assessment ratios per assessment criteria.
Hence:
A. Market Valuation
Ratios : Price to Earnings vs Price to Book
B. Profitability Level
Rations: Profit Margin and Return on Equity
C. Liquidity Level
Ratios: Current Ratio vs Operational Cash Flow Ratio
D. Debt Level Ratios:
Total Cash vs Total Debt
For various reasons –
the focus on other important macro topics and micro case studies, and
the range-bound 'barrel-roll' of US auto-equities (awaiting a Main
Street derived corporate earnings catchup) –
investment-auto-motives did not provide 'Coupled Ratios' analysis for
Q3 and Q4 2013.
Furthermore, the
provision of Q1 2014 is deliberately delayed given the impact of a
lower winter auto sales impact in North America, the likewise slowing
of what have been impressive UK and Germany sales, and the still
deflated (though improving) picture elsewhere in Europe.
Contrast and Compare Q1
to Q2 -
So as to provide a
better comparison for company specific and cross-sector positional
performance between Q1 and a soon to be released Q2, the Q1 charts
are provided herein, with resized 'investment windows' as appropriate
to improved general economic conditions.
As is the norm,
investment-auto-motives spotlights the number of appearances made by
a specific VM within each 'investment window'. Those with the most
appearances gaining most favour.
[NB to re-confirm, data
is drawn from standard publicly available sources: market data intel
companies and individual corporate accounts. In periods of poorer
profitability and cash-flow creations such as Q4 and Q1 periods for
some, limited transparency inevitably emerges. Thus if not stated
openly within accounts or presentations, the standard basic formula
of Operational Cash Flow is simplistically calculated as best
possible: from EBIT – (Capex + Financial Investments)].
The attached chart
presents the four graphs, with a depiction of how each VM has altered
(or not) its respective position regards the eight overall measures.
Market Valuation Ratios
-
Here it can be seen
that the majority of companies saw their P/E levels rise over the
previous months as once tentative investors continued to return with
greater confidence into the 'common-sense' cyclical realms of capital
markets.
This perhaps best seen
with the near doubled p/e increase of Volkswagen. Whilst the same
effect appears the case with Renault, it is far more likely that the
substantial p/e level rise to 32 has been pushed up by more overtly
'early-bird' speculative monies awaiting the broad growth of the
French economy from its present low base-line.
As can also be seen,
other company valuations are being extended with such confidence, the
p/e and price to book levels of Daimler, BMW, Toyota, Honda and FIAT
crowded within or just beyond the top right hand corner of the
'investment window'.
Of these because of
price to book levels Daimler and BMW sit just beyond the acutely
conservative boundary (though still p/e relevant), whilst Toyota,
Honda and (a re-entered FIAT) sit respectively well within and just
on the margin. GM and Ford presently sit as theoretical outliers, GM
because of its sector high p/e (near 20x) and Ford because of its
sector high p/b (near 1.5x). The lack of useful PSA data means that
it sits effectively 'undetermined' (as was), although for
'early-birds' the relatively recent French-Chinese equity take
provides a form of investment assurance over the long term. Hyundai
sits most central within the investment window, although its low p/e
reflects its heavy conglomerate nature, so slow but steady upward
progress made.
Profitability Ratios -
Mixed fortunes here as
the previous high-flyer of VW stalled, sliding far to the margin of
the 'window', whilst Hyundai's lower cost base and large cash cushion
gave it comparative ability to better maintain its good profitability
level, its RoE subsumed to profit margin; so near stationary position
YoY. BMW and Daimler remained inside the window, though BMW saw
greater profit improvement over the Q3 2013 to Q1 2014, as Daimler
slipped a little. Toyota improved to align itself with BMW, with
Honda also shifting into the 'window', albeit just onto the boundary.
GM and Ford remained outside the “stock pen” with blue oval
improving profitability over 'the General'. Renault saw a small
decline, whilst FIAT's profit margin stayed static, but with a noted
improvement in RoE.
Liquidity Ratios -
As regards liquidity
generation, Toyota pulled far ahead of others in Q1 (Japan's
“Abenomics” with a devalued Yen a strong tailwind). Thereafter in
order were: GM, BMW, VW, Daimler and Hyundai.
Ford and Honda were set
to eventually enter the 'investment window' but were presently sat
beyond the margins. Renault saw improved liquidity levels YoY, unlike
FIAT and PSA experiencing cash-burn.
Debt Ratios -
A story of cash
depletion between Q2 2013 and Q1 2014 appears the case for most, an
outcome of of necessary market incentives, reduced by present CapEx
demands and extra-ordinary expenditure on high profile product
recalls.
GM, Hyundai and FIAT
shared the high-ground of cash reserves vs debt levels, all sat
within the 1:2 arena. Renault slid YoY to a new position at the lower
edge of 1:3, whilst VW improved cash levels to also sit within the
1:3 area. Within 1:4 were Honda and PSA. Whilst just beyond the
boundary were BMW, Daimler Ford and tailing Toyota.
Results -
Market Valuation Ratio:
The once closely
positioned VW and Hyundai have separated over the past 12 months, as
investor traction gained for Europe's biggest producer even as both
company's profitability declined somewhat from previous strength.
Hence the middle-ground of the 'investment window' has been
hollowed-out (rather akin to mainstream car markets. Nonetheless,
within investment bounds at Q1 were: VW, Hyundai, Toyota and Honda.
(FIAT, BMW and Daimler
close contingents).
Profitability Ratios :
By Q1 2014 it was seen
that Hyundai retained its leadership, with BMW and Toyota sharing
near equal second place, Daimler stationary, VW on the window edge,
and Honda similarly placed with VW when newly entering the territory.
(Ford set on a vector
for later entry)
Liquidity Ratios:
Herein Toyota led, with
GM, BMW, VW, Daimler and Hyundai
(Ford and Honda
expected to enter over successive quarters)
Debt Ratios:
Here GM, Hyundai and
FIAT demonstrate their conservative approach to self funding.
'Investment Window'
Appearances -
Hyundai: 4
VW: 4
Toyota: 3
Honda: 2 (but
approaching 3)
BMW: 2 (but approaching 3)
Daimler: 2 (but
approaching 3)
GM: 2
FIAT: 2
Renault: 1
Ford: 0 (but
approaching 2)
PSA: 0
Conclusion -
Herein for Q1 2013,
Hyundai and VW continued to mark themselves out as the strongest
candidate, but with the rapid advancement of Toyota in recent quarters.
Thereafter, the three
most prevalent 'progressives' are: Honda, BMW and Daimler, themselves
presently appearing twice but fast approaching the likelihood of
thrice. So apparently offering greater near-term upside for investors given respective advancement.
As seen, each of the 'premier trio' has had a different share price journey over the intervening 3 month period.
Hyundai, thanks in
large part to its high profile sponsorship of 'Brazil 2014' and so
expected 'share of mind' in real world car markets has seen its stock
rise since Q1 in its usual steady manner from about E46 to E55, even with
previous QoQ profit contraction.
VW has seen its share
price move in a volatile manner, from E185 to top-out repeatedly at
E194 and return recently back to E185. VW executives now doubt
hoping the German World Cup win will provide new homeland consumer confidence and so sales
impetus to break the E194 ceiling.
Toyota, previously much assisted
by the BoJ's QE exercise, Yen deflation and subsequent accumulated
cash reserves, now effectively armed for battle in the US market, hopes to see
its share price continue to march upward from its low of $104 in
April, now at $119.
To End -
Thus, as always stated by investment-auto-motives, the corporate fundamentals must be set within the context of the broader macro environment, with recognition of the often subtle internal and external forces which can help or hinder corporate performance.
A raft of inter-related dynamics exist beneath the surface of these seemingly clinical, graphically depicted numbers, yet the numbers themselves derive from the actual and perceived complexities of the internal corporate and external market worlds.
The investment mind obviously seeks to re-assemble such obvious and opaque informational strands to form tomorrow's picture, and the immediacy of Q2 2014.
