By any number of quantitative measures, European auto companies are in pretty good financial shape. Sales have rebounded to pre-recession levels. Profits are steady, if not soaring, despite a recent blip attributed to the new WLTP testing regime. At the same time, automakers are building a technological base for mass electrification and autonomous driving. According to Mike Dean, an automotive equity research analyst at Bloomberg LP in London, the sector has revenues of more than half a trillion euros and profitability of about 50 billion euros.
Yet, in one important measure -- share price -- European automakers are falling flat. The sector as a whole, including suppliers and known as SXAP, has underperformed the market as a whole by 12 percent since June, with automakers historically trading at a 30 percent discount, according to a report by UBS. (Suppliers are faring somewhat better, UBS said, but warned that their current valuations may be too high as the Chinese market slows.)
“Despite these strong profits and strong demand, the European auto sector is pretty much unloved by the stock market,” Dean said during a presentation at this year’s Paris auto show. By his calculations, the sector trades at an average of seven times price to earnings, versus a p/e ratio of 14 for all European stocks -- or a 50 percent discount. That gap has gotten wider because of uncertainty about future earnings streams and disruptions created by the tech industry, he said.
As has been noted many times, share price reflects what investors think a company will do in the future. Thus, traditional vehicle manufacturers struggle to attract investors, while Tesla’s shares soar -- despite having virtually zero earnings. Put another way, Tesla’s market capitalization in mid-November was about 53 billion euros, while PSA Group’s was about 18 billion euros.
“What do investors like?” Dean asked. “They like electrification and autonomous driving” -- in other words, future trends, where the Teslas and Waymos of the world are expected to lead. “European companies do have tech credentials,” he said, noting that traditional automakers have doubled their r&d spending in recent years. “But it’s up to them to better structure their businesses to improve valuations.”
That restructuring could include spinning off the truck business at Daimler, for example, or Porsche from Volkswagen Group. A model for that is Ferrari, which was spun off from Fiat Chrysler in 2015 with the clever stock symbol RACE, and now has a market cap of $22 billion. (Fiat Chrysler’s is about $23 billion). VW has played down speculation about a Porsche spinoff, but Dean thinks a stand-alone Porsche would equal Ferrari’s market performance. He added that Daimler could triple its valuation through spinoffs.
Part of the issue is definitely perception, said Sam Abuelsamid, an analyst at Navigant. Automakers are increasingly heading to CES in Las Vegas rather than traditional auto shows to showcase their wares in front of the tech media -- “which is what these financial analysts are watching,” he said. “They’re trying to get across the message: ‘Hey, we are as technologically advanced as anyone in Silicon Valley.’ And, in many respects they are,” Abuelsamid said.
So, do traditional automakers have an image problem, or is the industry doomed to face a life-or-death struggle with upstarts such as Tesla and tech giants including Waymo, which is part of Google’s parent company Alphabet?
The next few decades look to be challenging ones. Dean said the transition to electric vehicles will be slow, it will be costly, and it will put pressure on automakers’ margins. “You can see why European automakers have been slow to accelerate their electric programs. The key question is: Can traditional automakers become the mobility providers of the future?” Dean said. “Given what the stock market thinks of these companies at the moment, that is certainly unclear.”