Topics in this section: - U.S. automakers valuations pull back on flurry of profit hits - Automaker shares lose the road forward in 2H - Tech reputation, Model 3 help Tesla outperform - Few catalysts to aid ailing automaker valuations
Valuation multiples of U.S. automakers have fallen faster than the broader market as solid -- albeit flat -- demand and a favorable shift toward trucks from cars in the domestic market has been overwhelmed by negative catalysts. Manufacturers' shares face the overhang of whether electric-vehicle technology will be ready for the next upturn in the sales cycle.
Automaker shares lose the road forward in 2H
After periods of outperformance vs. the S&P 500 in 1H, North American automaker shares have trailed the index by over 14 percentage points since the peer group's 2018 high on June 18. Challenges are mounting against U.S. and most other global manufacturers, with falling vehicle sales in China, higher raw-material prices and a strong dollar putting a dent in global automotive profitability. With R&D investment needed in electrified drivetrains and advanced mobility technology, U.S. automakers are heading into a period of depressed earnings generation.
A solid and flat U.S. auto market, with still supportive volume and a positive shift toward higher-margin vehicles, is one key tailwind for the group as North American operating income remains robust.
Tech reputation, Model 3 help Tesla outperform
The shares of of legacy U.S. automakers have fallen in 2018, with each underperforming the S&P 500 by at least eight percentage points. Tesla is the outlier among domestic manufacturers, as scaling up Model 3 production has driven shares 11% higher year-to-date, though with no lack of volatility as the stock has shed more than 20% in less than a month on three separate occasions this year. Far on the other end of the spectrum is Ford, which has posted a negative 20% total return and remains mired in operating uncertainty.
General Motors and Fiat Chrysler, the two best fundamentally positioned U.S. automakers in terms of product and technology, make up the middle performers, down 15% and 8%, respectively.
Few catalysts to aid ailing automaker valuations
Automobile manufacturer valuations reflect pessimism, as the peer group's 7.7x P/E multiple is only modestly off the year-to-date low. Tesla isn't included in the calculation since it isn't profitable in 2018, but the company trades at 70x forward 12-month earnings. The sharp share price decline and lack of clarity around restructuring plans hasn't prevented Ford from pulling a higher multiple than General Motors and Fiat Chrysler. Significant headwinds are baked into auto earnings multiples, though North America manufacturers have the potential for resilient demand and earnings power -- the few possible positive catalysts -- to spur multiple expansion in the coming quarters.
