North America Equity Research
22 September 2014
See Attractively Deep Value in GM As We Roll Out
2016 Estimates for US Automakers; Like Ford;
Cautious on TSLA
We introduce our 2016 estimates and roll-forward valuation for GM and Ford, finding +50% upside in the case of General Motors and +32% in the case of Ford. Our established 2015 price targets increase on newly considered 2016 earnings rather than 2015 in our valuation analysis and on capital structure roll-forward as the firms generate sizable cash flow. 2016 earnings are expected to rise relative to 2015, on industry tailwinds (continued trend toward more normal volumes in Europe, cycling past a period of atypically strong macro headwinds in South America, robust growth in China, and continued cyclical increase in North America even if at a lesser rate) as well as various different self-help initiatives (e.g., as restructurings in Europe, Australia, and elsewhere take further hold, and on cost control efforts in North America). We reiterate our Overweight ratings on both GM and Ford, seeing more value in automaker stocks than in supplier stocks generally, on earnings that are growing almost as quickly as the average supplier over our newly extended forecast window (and at least as structurally improved relative to history) but valuation which is only in line with historical average (Ford) or even significantly below (GM). We are more cautious on Tesla, however, with our Neutral rating balancing incremental news flow likely to track positive with valuation that appears stretched and execution and competitive risk that seems underappreciated.
Autos & Auto Parts
Bloomberg JPMA BRINKMAN
Samik Chatterjee, CFA
(1-212) 622 0798
J.P. Morgan Securities LLC
We prefer automakers to parts suppliers: they are growing earnings as quickly and their profitability is as structurally improved but, unlike suppliers, they do not trade at a premium to history. While we remain bullish on auto parts suppliers (see our concurrently published note, “See Most Upside to Secular Growers HAR (+40%), TEN (+39%), THRM (+37%), DLPH (+36%), and BWA (+35%) As We Look to 2016”), given our overall bullish industry view, we prefer automakers on valuation. Since July 2012, GM is +73%, Ford is +79%, and the average of the 16 parts suppliers we cover is +149% (vs. the S&P, +48%). This has resulted in the suppliers as a group trading at 7.1x NTM EBITDAP (vs. 5.3x historical long-run average), Ford trading at 4.7x, and GM at just 2.6x (vs. our sense of GM & Ford historical average valuation of roughly 3.75x to 4.75x). Over the long-run, we concede suppliers are likely to grow earnings more quickly, on content per vehicle growth stories (e.g., along the lines of “Safe, Green & Connected”), although our analysis shows automakers hanging in there with suppliers medium-term (on full-size truck refreshes, abating of restructuring costs, and realization of restructuring savings), with GM growing EBIT at a +13% CAGR and Ford +15% through 2016, relative to the average auto parts supplier +13%. Equity Ratings and Price Targets
Source: Company data, Bloomberg, J.P. Morgan estimates. n/c = no change. All prices as of 19 Sep 14.
See page 42 for analyst certification and important disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors...
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