INTRODUCTION
Area of the study
This study aims to analyze the performance and intrinsic values of four leading automotive companies—Toyota, Ford, Tesla Motors, and General Motors—across their primary markets in the USA, Europe, and Asia-Pacific Additionally, the dissertation seeks to enhance understanding of the key players in the automobile market and provide investment recommendations for potential investors in these firms.
Study objectives
The following report objectives was developed to see the whole picture of the automotive industry and provide valuable investment recommendations:
1) To provide insights on the automotive industry
2) To analyse main macroeconomic factors and key economies where automotive industry product are consumed the most, namely USA, Europe and Asia- Pacific
3) To To analyse the automotive industry in the three regions above
4) To analyse financial ratios of all four companies selected according to their financial situations, with emphasis on Debt-to-Equity ratio, Inventory Turnover ratio, Return on Equity ratio
5) To calculate intrinsic value of these leading firms with valuation models
6) To conclude final investment recommendations following the analyses and evaluation of four companies’s intrinsic value
The study employs a top-down analysis method, beginning with an evaluation of the national economic environment impacting the automotive industry It then focuses on the industry itself, before analyzing the performance of individual companies Finally, the study proposes a pricing strategy based on the valuation models utilized.
MACROECONOMICS ANALYSIS
The Global economy outlook of 2020: PEST analysis
The influence of government and regulatory agencies on international business has highlighted the importance of political factors, particularly for automobile companies between 2018 and 2019 Key political events such as Brexit and trade wars have created uncertainty that significantly impacted the automotive industry In response to the downward pressure from these forces, companies must adapt their business strategies Despite the challenges posed by trade conflicts in 2019, the industry demonstrated resilience and effectively managed increased pressures Political uncertainty, including elections in Italy and trade disputes between China and the U.S., has negatively affected global auto stocks and sales Additionally, trade restrictions and customs policies have further influenced vehicle sales during this period As a result, the automotive sector prioritizes understanding global political conditions in its business planning While controlling political risks is challenging due to their unpredictable nature, focusing on customer experience and strategic business planning can help mitigate their impact.
The global economic environment significantly influences automobile brands, with poor economic conditions leading to a decline in vehicle sales In 2020, the severe impacts of Covid-19 resulted in negative economic growth rates across many countries, adversely affecting automobile demand Consequently, the automotive industry is projected to experience a decrease in revenue due to these challenging circumstances.
USA’s GDP plummet 32,9% in Quarter 2/2020 compared to the same period of 2019 (BBC,2020)
Experts remain uncertain about when consumer demand will stabilize, as many individuals are hesitant to make significant investments amid ongoing uncertainties regarding job security and the duration of the pandemic Until there is a clearer end to the crisis, consumer confidence and demand for new vehicles are unlikely to see a swift recovery.
Despite advancements in medical technology and a global commitment to resource allocation, a Covid-19 vaccine is still not imminent In the meantime, shelter-in-place orders and social distancing remain essential to curbing the virus's spread As some countries attempt to reopen their economies, concerns about a potential second wave have led governments to reimplement closures and other public health measures.
Manufacturers will probably be handling this crisis through the end of the year at least, and possibly well into 2021
The COVID-19 pandemic is likely to lead to lasting changes in consumer preferences for cars, as many individuals are expected to continue favoring private vehicles over public transportation, even after the crisis has subsided.
Society and culture play a crucial role in international business, making it essential for companies to stay attuned to social and cultural shifts Recent years have seen significant changes driven by digital technologies, which are transforming lifestyles and creating new trends across the globe, from Asia to Europe and the Americas This evolving relationship between society and businesses emphasizes the importance of strong connections with customers and employees As digital technology reshapes industries, it also alters consumer needs and expectations Leading automobile brands, for instance, are leveraging digital advancements to enhance customer experiences, while adapting their strategies to meet the growing demand for vehicles equipped with advanced safety features and options.
13 experience They also like cars with lower emissions Many firms other then Tesla are also investing in autonomous driving technology since the demand for such cars has grown In 2019-
In 2020, the demand for electric cars surged, leading to increased sales from major brands like Tesla, BMW, and Volkswagen As all leading automotive manufacturers invest in electric vehicles, these eco-friendly cars not only enhance fuel efficiency but also contribute positively to the environment This shift has enabled brands to boost sales and sustain growth momentum, even during challenging economic periods.
Automotive companies hold significant social responsibility, necessitating a commitment to community-beneficial projects Many firms incorporate social engagement into their programs, fostering intercultural exchange over the years In collaboration with the UN Alliance of Civilisations, these companies recognize and reward exemplary initiatives in this area Additionally, they incentivize employees for their volunteer contributions and leverage their resources and financial strength to tackle social challenges effectively.
As consumer preferences evolve, the emphasis on design aesthetics in the automobile industry has become crucial for brands aiming to maintain a competitive edge Attractive car designs, both interior and exterior, play a significant role in differentiating auto brands and driving sales This focus on beauty and style is integral to the sales strategies of many firms, as modern consumers seek not only utility but also a holistic and visually appealing experience that enhances their lives.
Technology plays a pivotal role in the growth of the automobile industry, with digital advancements enabling auto firms to enhance customer experiences Companies like Tesla and Volkswagen are investing in new technologies to improve safety and driving enjoyment, while autonomous driving innovations expand their customer base Digital tools are also streamlining marketing efforts, utilizing websites, social media, and blogs to effectively reach diverse audiences By employing both global and regional websites, leading firms can connect with customers in specific markets From production to sales and after-sales service, digital technology enhances efficiency across all sectors of the industry The automobile sector's growth relies heavily on technological investment and research into customer lifestyle influences, as seen with companies like Tesla and General Motors prioritizing digital innovation in their strategies As customer lifestyles evolve, the success of auto firms increasingly hinges on their ability to innovate technologically.
Leading automotive companies are producing advanced vehicles that prioritize efficiency, performance, and passenger safety To address the increasing global demand, numerous new electric car models have been introduced Research and development are crucial for the growth and success of these firms, with key areas of focus including electric mobility, autonomous driving, and digitalization, particularly among luxury car manufacturers.
The U.S automotive industry remains fragile, with vehicle sales in August plummeting 20% year-over-year to 1.33 million units, despite the extended Labor Day weekend From January to August 2020, total sales reached 8.8 million units, reflecting a 23% decline Notably, Toyota experienced a significant drop of 24.6%, while Honda saw a decrease of 23% In contrast, Hyundai fared better with an 8.4% decline Ongoing limited inventories and reduced incentives continue to hinder sales growth.
The easing of lockdowns and the introduction of stimulus packages in various countries have positively impacted the automotive industry, with vehicle sales in August surpassing 1.2 million despite a 16% year-on-year decline This performance is noteworthy, especially when compared to the exceptionally high sales figures in August 2019, driven by automakers' urgency to sell uncertified vehicles before the September 1, 2019 deadline for the Worldwide Harmonised Light Vehicles Test Procedure (WLTP).
China automobile sales continue to recovery fast and steadily Vehicle shipments reached more than 2.2 million units in August, up 11.6% in YoY basis Total shipments from January to August
In 2020, vehicle sales declined by 10% year-on-year, but a recovery is anticipated in the coming months, fueled by improving consumer sentiment and supportive policies for New Energy Vehicles (NEVs) These policies include the elimination of vehicle purchase taxes on NEVs and the extension of subsidies through 2022, with a gradual phase-out Additionally, the government has announced an increase in the NEV credit ratio, rising from 12% in 2020 to 14% in 2021, 16% in 2022, and reaching 18% by 2023.
16 The graph below illustrates vehicles’s sales in three different regions in four months of 2020 (BCG, 2020), we can see that sales in China have been recovered the fastest.
The European market
The easing of lockdowns and the introduction of stimulus packages in various countries have positively impacted the automotive industry, with vehicle sales in August surpassing 1.2 million, despite a 16% year-on-year decline This performance is noteworthy, especially when compared to the exceptionally high sales figures of August 2019, driven by automakers' urgency to sell uncertified vehicles before the September 1, 2019 deadline for the Worldwide Harmonised Light Vehicles Test Procedure (WLTP) testing.
The Asia – Pacific market
China automobile sales continue to recovery fast and steadily Vehicle shipments reached more than 2.2 million units in August, up 11.6% in YoY basis Total shipments from January to August
In 2020, the automotive market experienced a 10% decline year-over-year; however, recovery is anticipated in the coming months due to improving sentiment among car buyers and supportive pro-NEV (New Energy Vehicle) policies These policies include the elimination of the vehicle purchase tax on NEVs and the extension of subsidies until 2022, with a gradual phase-out Additionally, in June, the government announced an increase in the NEV credit ratio, rising from 12% in 2020 to 14% in 2021, 16% in 2022, and reaching 18% by 2023.
16 The graph below illustrates vehicles’s sales in three different regions in four months of 2020 (BCG, 2020), we can see that sales in China have been recovered the fastest
Industry Analysis – Porter’s 5 Forces
Threat of Substite
While various transportation options like taxis, buses, trains, and planes exist, none offer the same level of accessibility and convenience as owning a car A personal vehicle provides 24/7 availability, unlike public transport, which requires waiting for the next service if missed Although alternative modes are easier to maintain, car ownership is often seen as a symbol of convenience and prestige Consequently, the threat from substitutes is diminished, though daily commuters may still opt for trains or buses for their affordability and ease.
Threat of New Entrants
Entering the automobile industry poses significant challenges for new brands due to the substantial investment needed for manufacturing facilities, distribution networks, and skilled personnel The intense competition from established brands further complicates matters, as new entrants must offer innovative and differentiated products to capture market share Additionally, increasing legal requirements have created further barriers to entry Existing brands benefit from strong brand image and equity, making it crucial for newcomers to prioritize engineering and product quality While accessing raw materials may be relatively straightforward, achieving economies of scale remains a hurdle for smaller players Furthermore, penetrating new markets can be difficult, especially with some governments imposing high import taxes to deter foreign brands.
Several factors reduce the threat posed by new entrants in the automobile industry Aside from Tesla, few new brands have successfully established a significant presence on the international stage.
Bargaining Power of Suppliers
In the automotive industry, suppliers possess weak bargaining power, primarily due to the dominance of a few large manufacturers like Volkswagen, Ford, and Tesla Most suppliers are small players and must operate within the constraints established by these vehicle brands Additionally, the threat of forward integration from suppliers is minimal, as they rely heavily on the abundant availability of raw materials dictated by the market.
19 switching from one supplier to another is not difficult for them In this way, the bargaining power of suppliers is considerably low.
Bargaining Power of Buyers
In the automobile market, individual buyers typically purchase single vehicles, while corporations and government agencies often acquire fleets, allowing them to negotiate for lower prices Both small and large buyers can easily switch brands without incurring significant costs, making them price-sensitive and likely to choose better products at lower prices Despite their purchasing power, neither individual nor corporate buyers pose a threat of backward integration Consequently, their overall bargaining power is considered moderately strong To foster customer loyalty, brands focus on design, quality, and competitive pricing amidst increasing competition and evolving consumer trends in the industry.
TOYOTA COMPANY
Company description
Toyota Motor Corporation, based in Japan, operates in various sectors, primarily focusing on the automobile industry, which includes the design, manufacture, and sale of a wide range of vehicles such as sedans, minivans, SUVs, and trucks, along with their associated parts The company markets its vehicles in approximately 190 countries and regions worldwide Additionally, Toyota has a finance segment that provides vehicle leasing and financing services Beyond automobiles, the company also engages in the design, manufacture, and sale of houses and operates in the information communication sector Furthermore, Toyota manages manufacturing and sales subsidiaries, as well as public relations and research activities across North America and Europe.
As of September 1 st , 2020, Toyota is the 2 nd largest automotive firm in the world regarding their makert value, after Tesla
The graph above by Statista (2020) shows that Toyota market share is the largest in 2019, but their market value was topped by Tesla for its stock market rally in August 2020.
Business model and strategy
Toyota Motor Corporation employs a hybrid strategy that blends cost leadership and broad differentiation By minimizing operational costs and selling prices, Toyota achieves cost leadership, while simultaneously focusing on product uniqueness to secure a competitive edge This strategic combination enhances Toyota's ability to reach diverse global market segments effectively.
A strategic goal corresponding to Toyota’s generic strategy is to minimize production costs to attain cost leadership The company does so through the JIT (just-in-time) manufacturing
The 22 method, or Toyota Production System (TPS), focuses on minimizing waste, reducing inventory costs, and improving response times, ultimately maximizing business efficiency Additionally, Toyota aims for innovation to enhance its broad differentiation strategy, aligning with its overall strategic goals.
Innovation leads to unique and attractive products for all market segments Thus, Toyota fulfills its generic strategy
Toyota's primary growth strategy focuses on market penetration, aiming to attract more customers within its existing markets To achieve this, the company provides a diverse range of products, including sedans, trucks, SUVs, and luxury vehicles, catering to various customer segments This approach not only enhances sales volume but also minimizes the cost leadership aspect of Toyota’s overall strategy, allowing the company to maintain profitability even with lower selling prices.
Toyota employs product development as a key strategy for growth, leveraging rapid innovation to attract new customers This approach is exemplified by the Toyota Prius, which appeals to environmentally conscious consumers By focusing on innovative products with advanced features, Toyota enhances its broad differentiation strategy, effectively positioning itself in the market.
Toyota's market development strategy serves as a supportive intensive growth approach, leveraging its extensive global presence By entering new markets and targeting diverse market segments, the company enhances its already widespread reach With established sales across various market segments worldwide, this strategy reinforces Toyota's cost leadership by optimizing its global market footprint.
SWOT analysis
A strong human resource is essential for a company's growth, and Toyota exemplifies this with its vast global workforce By investing in skilled professionals, Toyota has reaped significant returns, boasting over 300,000 talented employees worldwide as of 2018.
Toyota leads in innovative organizational culture, exemplifying advanced operating systems and functional strategies Its widely adopted management systems and lean manufacturing practices serve as benchmarks for other companies striving for excellence.
Strong Brand Image– This is obviously one of the most important strong points of
Toyota Whenever people look for cars, they search for the brand name ‘Toyota,’ and that has kept them far ahead of their competitors
Toyota boasts a robust and diversified portfolio, offering a wide range of vehicles, including electric and hybrid cars, which showcases their commitment to catering to various market segments.
Toyota is recognized not just as a car manufacturer but as a leader in innovation, particularly with its advanced hybrid technology The company's commitment to green vehicle technology resonates with environmentally conscious consumers, especially in light of rising petrol prices.
Toyota's robust global supply chain, featuring numerous outlets, branch offices, and manufacturing facilities worldwide, stands as one of the company's greatest strengths.
High Production Capability– Toyota is giving serious competition to its contemporaries on this point as they have a high production capacity of producing cars, almost 10 million per year
Dependence on Suppliers– as Toyota has suppliers around the world; they have to depend on them It makes the production a little sloth
Toyota has made strides in green technology, yet it has struggled to effectively penetrate key markets for implementation The burgeoning markets of China and India present significant opportunities for the launch of these eco-friendly vehicles, but the company still faces challenges before making a successful entry.
Negative publicity often arises from significant vehicle recalls, a challenge that affects all automakers, including Toyota The frequency of recalls at Toyota tends to be higher, which can lead to increased negative attention and scrutiny for the brand.
Poor Brand Recognition– There are 4 different flagships of Toyota- Hino, Lexus,
Daihatsu, and Among these, Toyota have been successful in making the brand recognition
The growth of Developing Nations– Perspectives is changing, and now, people are more inclined to buy cars In the developing nations, the demand for cars is exuberating
Green vehicle technology is steadily gaining popularity globally, presenting significant revenue opportunities for companies like Toyota By prioritizing advancements in this sector, Toyota can capitalize on the growing demand for eco-friendly transportation solutions.
As global awareness of environmental pollution increases, individuals are becoming more proactive in addressing environmental degradation Now is the ideal moment to promote Toyota's eco-friendly initiatives and products, aligning with the growing commitment to sustainability.
Number of Competitors– Toyota is competing with huge names in the market, like Volkswagen, Ford, Mitsubishi, and Hyundai It makes quite hard to make strong feet in the market
High-priced Raw Materials– As the cost of raw materials is increasing, that is also increasing the cost of the end product
The persistent fluctuations in exchange rates pose a significant challenge, leading to reduced profits When revenues are converted back to Japanese Yen, they often result in lower earnings compared to other currencies.
Financial health
Income Statement Evolution of Toyota from 2018-2020 and expected results of 2021-2023 (Market Screener,2020):
Annual Income statement data (Market Screener,2020):
Key financial ratios
The profit margin reflects a company's operational efficiency in generating profit per dollar of sales, with a high operating margin indicating strong pricing power or cost efficiencies Toyota exemplifies this with its state-of-the-art manufacturing process, characterized by high automation Although Toyota's operating margin experienced significant fluctuations from 2006 to 2015, the company improved this metric, achieving a consistent operating profit margin of approximately 8.16% from 2018 to 2020 Additionally, Toyota's return on assets (ROA) and profit margin surpass the industry average, highlighting the company's financial efficiency.
However ROE of the company in 2020 is below automotive industry average since their shareholder’s equity keep increasing in recent years
Toyota's success as a manufacturer relies significantly on its ability to create appealing cars that resonate with consumers, leading to high inventory turnover and frequent sellouts throughout the year.
The inventory turnover ratio measures how often a company's inventory is sold and replaced over a specific period, with a higher ratio indicating efficient inventory management In 2020, the inventory turnover ratio improved to 10.07, up from 9.33 in 2019 and 9.4 in 2018, suggesting that the company is effectively reducing idle stock and optimizing its inventory strategy.
Toyota's profitability is currently challenged by liquidity issues, as evidenced by a Debt/Equity ratio of 0.58, which aligns with the automotive industry average However, the company's Quick and Current ratios indicate poor performance due to low cash equivalents.
Valuation
This model values a stock's price by utilizing competitor multiples ratios, making it a straightforward tool for quick calculations It enables efficient comparisons of stocks within the same industry.
Price/LTM EPS Multiples Price/FWD EPS Multiple
Benchmark LTM P/E Ratio 26.5x Benchmark Fwd P/E Ratio 26.2x
Historical LTM P/E Ratio 8.3x Historical LTM P/E Ratio 8.3x
(x) LTM Net Income 1,552,052 Selected Fwd P/E 22.1x
(=) Equity Value 24,677,627 (x) Fwd Net Income 619,565
Implied Value Range 17,509.32 (/) Shares Outstanding 1,409.4
FX Rate: JPY/USD 104.6 Implied Value Range 9,715.05
Implied Value Range 167.40 FX Rate: JPY/USD 104.6
Fair value of Toyota using multiple valuation is $130.14 per share, smaller than the current market price
4.6.2 Discounted Cash Flow Model (DCF)
This model imply that Toyota share is underrated with its intrinsic value is $189.83 per share, which is 44.7% higher than its market value
Combining both models, we can conclude the Toyota stock target price is $159.98
FORD COMPANY
Company description
Ford Motor Company, founded by Henry Ford on June 16, 1903, is an American automobile manufacturer based in Dearborn, Michigan The company specializes in designing, manufacturing, financing, marketing, and servicing a diverse range of vehicles, including cars, trucks, SUVs, and luxury models under the Ford and Lincoln brands Operating across six continents, Ford's business is structured into five geographic segments: North America, Europe, South America, the Middle East and Africa, and Asia Pacific In 2019, Ford achieved global wholesale vehicle sales of approximately 6.6 million units.
The company operates through four key segments: Automotive, Financial Services, Ford Smart Mobility LLC, and Central Treasury Operations The Automotive segment focuses on the sale, development, manufacturing, design, distribution, and servicing of Ford and Lincoln brand vehicles, along with their accessories and service parts.
Business model and strategy
Ford Motor Company aims to create trusted vehicles that enhance daily life by reducing congestion, preventing accidents, and lowering emissions To realize this vision, Ford is significantly investing in transformative technologies and collaborating with major delivery services like Walmart, Domino’s, Lyft, and Postmates to pilot self-driving vehicle projects Additionally, Ford has formed a joint venture with Chinese automaker Zotye to develop and manufacture all-electric vehicles, which will increase its electric vehicle lineup by 40 models.
Ford is set to introduce 32 electric vehicle models globally, including 16 full battery vehicles by 2022, supported by an additional USD 11 billion investment in electrification To enhance competitiveness, CEO Jim Hackett announced a streamlined passenger car lineup, with production limited to just two models: the Mustang sports car and the Focus Active crossover for the U.S market.
Ford Motor Company offers a diverse selection of vehicles globally, featuring its Ford brand and a range of luxury automobiles under the Lincoln brand in the U.S The primary product lines include the Family of Ford Cars, the Family of Crossovers and SUVs, the Family of Trucks and Vans, and Lincoln luxury vehicles.
SWOT analysis
The Ford brand stands out as one of the most valuable assets for any organization, boasting a brand value of $11.21 billion as of 2019 Renowned globally for its innovative product line and forward-thinking advancements, Ford has established a robust global dealership network and a dedicated customer base, solidifying its position as one of the world's leading brands.
Ford boasts a significant global presence, with manufacturing operations in 62 countries and a robust sales and distribution network The company has successfully established its foothold internationally, supported by a vast network of over 18,000 dealerships across the United States.
Ford also continually focuses on expanding through strategic partnerships and dynamic business models
North America is Ford Motor's most lucrative market, with over $160 billion in revenue generated in 2019, according to Statista The company holds a 14.4% share of total automobile sales in the United States.
With a futuristic outlook, Ford invests heavily in research and development In 2018 the company invested $8.2 billion for technological research and innovation
The Ford Greenfields Labs in Palo Alto, California, is a leading automotive research center in Silicon Valley, housing over 300 dedicated researchers, engineers, designers, and scientists The facility is expanding with the addition of two new buildings and 182,000 square feet of workspace, including advanced laboratories Its primary focus is on pioneering developments in the automobile industry, particularly in autonomous driving technology and energy-efficient vehicles.
Ford's strength is its diverse product range, catering to all demographics with vehicles across various categories, including SUVs, trucks, and luxury models The company emphasizes energy efficiency, introducing hybrid models like the Ford Explorer launched in 2020 To reduce emissions, Ford is committed to advancing fuel-efficient vehicles.
Ford has a poor reputation as compared to its peers Ford cars, especially the luxury brand
Lincoln, are considered to be of a lower quality than for example, General Motors or Toyota cars
As the largest share of Ford’s sales come from the U.S alone, this limits the market share and hence profitability of the brand
Ford has been plagued by frequent complaints of faulty products and associated recalls In
February 2019, the company had to recall over 1.5 million vehicles across the Ford and Lincoln brands (source: cnbc.com) on account of a faulty gear shift and related safety concerns
Lack of Foothold in Emerging Markets
Ford has struggled to establish a strong presence in key emerging markets in Asia, particularly in India and China With these regions projected to drive substantial vehicle sales growth, the company's lack of traction in these markets poses a serious challenge for its future success.
Ford is poised for growth in emerging markets, particularly in Asia, where the demand for consumer vehicles is surging This high demand presents a significant opportunity for Ford to expand its operations and capture a larger share of the market.
Ford has already invested heavily in developing driverless cars As such cars are expected to reduce the number of road accidents and improve traffic conditions, most auto manufacturers
35 such as Volkswagen and Tesla Motors are racing to adapt this technology to their vehicles Ford intends to have fully autonomous vehicles road-ready by 2021
Focus on Environment Friendly Vehicles
Ford has made notable strides in the energy-efficient vehicle market with the Ford Explorer Hybrid There is ample opportunity for further innovation in this sector, and Ford should capitalize on its existing strengths to position itself as a leader in environmentally friendly vehicles.
Collaborating with leading automotive brands can enhance Ford's market performance, particularly in Asian markets, while also expanding its operational network To this end, Ford has initiated an alliance with Volkswagen.
As competition intensifies in the global automotive market, Ford faces challenges in retaining its customer base With an influx of new players, the company must strategically prepare to compete against established global brands to sustain its market position.
Increased government regulations pose a significant threat to Ford Motor's profitability, both in the US and worldwide Additionally, trade wars and rising regulatory challenges are contributing to the company's declining performance.
Global economic sluggishness and currency fluctuations have significantly impacted Ford's performance in the automotive market With declining car sales worldwide, the company faces decreasing demand in an increasingly saturated environment.
Ford Motor Company is a globally recognized automotive brand with a robust presence in numerous countries Despite facing challenges like declining sales in China and frequent product recalls, Ford must prioritize technological innovation and explore opportunities in emerging markets to secure its future and maintain its competitive edge.
Financial health
Income statement evolution (Market Screener, 2020)
Annual Income statement datas (Market Screener, 2020)
Key financial ratios
Ford and GM’s fixed asset investments help generate 3.99 and 3.07 times revenue, respectively This means that Ford has been efficient at generating revenue form such investments
Ford's Days’ Sales in Receivables (DSO) ratio is 1.62 times lower than that of GM during the same period, indicating that GM is extending credit to customers and experiencing longer collection times for payments.
Ford's Accounts Receivable Turnover is significantly lower than General Motors', indicating that GM is more efficient in processing credit While Ford's conservative credit extension policy may benefit customers who require longer payment terms, it also highlights the company's struggles in managing receivables compared to its competitor.
The inventory turnover ratio examines how efficient a company was in turning around its
38 inventory Ford’s average inventory turnover was 17.53 times whereas GM’s was at 11.86 times a year A higher inventory turnover is better as it shows Ford is more efficient in managing their inventories
Days’ sales in inventory (DSI) indicate the average number of days a company requires to sell its inventory For instance, General Motors (GM) has a DSI of 37.59 days, whereas Ford has a significantly lower DSI of 26.49 days, highlighting Ford's efficiency in inventory turnover compared to GM.
In 2017, Ford's current ratio of 1.15 reflects strong liquidity, suggesting a reduced risk of cash flow issues, while GM's lower ratio of 0.89 raises concerns about potential liquidity challenges, indicating that the company could only cover 89% of its current liabilities through liquidation of its assets A high current ratio can also signal excessive inventory levels, inflated accounts receivables due to lenient collection practices, or an overabundance of cash reserves.
Ford's cash ratio averages 1.20x, indicating that the company can effectively meet all its current liabilities using its cash and short-term marketable securities.
General Motors faces challenges in meeting its current liabilities, reflected in a low cash ratio of just 0.53x This indicates that the company can cover only 53% of its current liabilities using its cash and short-term marketable securities.
Ford's quick ratio averages 1.32 over the past five years, demonstrating its capability to fulfill short-term obligations with quick current assets In contrast, General Motors has an average quick ratio of 0.82 during the same period, indicating that the company currently struggles to meet its short-term financial commitments.
39 back its current liabilities The higher quick ratio means that the company has more current assets to satisfy current liability needs
Gross Profit Margin (GPM) indicates a company's efficiency in converting sales into profit, with Ford achieving a GPM of 20.8% compared to GM's 17.7% This means that for every dollar of revenue, Ford earns approximately $0.208 in profit, while GM earns about $0.177 Ford's superior performance highlights its effectiveness in managing direct costs, resulting in a higher gross profit.
Return on Assets (ROA) is a key metric that evaluates a company's efficiency in using its assets to generate earnings A higher ROA indicates better asset utilization From 2013 to 2017, Ford reported an average ROA of 2.80 percent, while General Motors (GM) achieved a superior average ROA of 3.41 percent during the same period, highlighting GM's more effective asset management compared to Ford.
The Return on Equity (ROE) assesses the income generated for shareholders relative to their investment in the company In 2017, Ford achieved a ROE of 21.83%, contrasting sharply with General Motors' ROE of -10.89%, which was primarily influenced by substantial deferred income tax expenses linked to negative net income for that year.
Ford profitability compared to industry average (Chartmill,2019)
Valuation
Fair value of Ford using multiple valuation is $6.07 per share, smaller than the current market price
5.6.2 Discounted Cash Flow Model (DCF)
This model imply that Ford share is underrated with its intrinsic value of $6,98 per share, which is 1.6% higher than its market value
Combining both models, we can conclude the Ford stock target price is $6.53
TESLA MOTORS
Company description
Founded in 2003 by passionate engineers, Tesla aimed to revolutionize the electric vehicle market, overcoming the limitations of slower and less comfortable electric cars compared to traditional petrol and diesel vehicles Today, Tesla not only manufactures electric vehicles but also offers solutions for electricity generation and energy storage The company's mission is to reduce global reliance on fossil fuels and promote sustainability.
Elon Musk, the CEO of Tesla, is recognized globally as a leading figure in engineering innovation and solutions He is also the primary investor in the company, providing crucial financial support for its projects.
Business model and strategy
Tesla business model are summarized as belows:
Tesla's vertical integration allows it to operate its manufacturing plants and the Gigafactory, which produces battery packs and stationary storage systems for its electric vehicles These products are sold directly through Tesla's online store and physical locations.
Tesla's mission is to accelerate the transition to sustainable energy, as highlighted on their About page In 2008, they launched the innovative Tesla Roadster, their first high-performance electric sports car CEO Elon Musk emphasized that Tesla aims to expedite the shift from a hydrocarbon economy to a solar electric future, which he views as a key sustainable solution The Roadster is built on the Lotus Elise chassis, showcasing Tesla's commitment to cutting-edge design and technology.
The Tesla Model S can travel 244 miles on a single charge thanks to its advanced lithium-ion battery pack, and it is priced at $109,000 Tesla initially entered the market by focusing on the high-tech car segment as a niche differentiator, establishing a sustainable competitive advantage that sets it apart from traditional automakers with its eco-friendly electric vehicles.
Elon Musk emphasized that Tesla aims to penetrate the high-end market, attracting premium customers, before rapidly expanding to capture high volume sales at lower prices with subsequent models This competitive strategy of broad differentiation allows Tesla to target both premium and budget-conscious buyers in the automotive sector By consistently increasing its investment in research and development, Tesla sets itself apart from competitors, fostering a highly innovative ecosystem that enhances economies of scale and drives long-term growth.
Tesla offers a diverse range of products and services globally, including premium electric vehicles like the Model S, Model 3, and Model Y, with ranges between 250 to 370 miles and customizable features The company also provides solar solutions such as solar roofs, solar panels, Powerpacks, and Megapack batteries In line with its broad differentiation strategy, Tesla merged with SolarCity to enhance its clean-energy ecosystem, with Elon Musk asserting that the collaboration will lead to the most efficient and cost-effective solar cells To leverage its competitive advantages, Tesla aims to lower battery material costs through research, development, and automation, positioning itself as a niche player with broad differentiation in the market.
SWOT analysis
Tesla aims to transform the driving experience beyond merely selling cars by focusing on innovation in electric vehicles While not the only player in the electric vehicle market, Tesla is the brand that comes to mind for many when discussing electric cars, highlighting its significant impact on the industry.
Unlike other vehicle manufacturers that prioritize affordable electric cars, Tesla has carved out a niche in the luxury electric automobile market Since its inception nearly 20 years ago, Tesla has faced no competition in this specialized segment, allowing it to focus on delivering high-end electric vehicles to discerning consumers.
The founders established themselves in a niche market ahead of competitors, enabling them to consistently maintain dominance Today, the Tesla brand wields significant influence and power within the industry.
In recent years, Tesla has experienced significant growth, driven by enthusiastic consumers eager to learn about the future of electric vehicles and the emerging reality of self-driving technology.
The US government has significantly bolstered Tesla's growth, providing over $365 million from the Department of Energy to support its energy management initiatives Tesla's success can be attributed in part to its strategic timing, as the company launched during the clean tech initiative under former President Barack Obama, allowing it to leverage government advantages effectively.
Tesla's remarkable success has prompted major automakers like Toyota and Mercedes-Benz to embrace the innovative technologies pioneered by the company, solidifying Tesla's position as a leader in the automotive industry.
Despite the millions given to them by the government, Tesla has burned through a vast amount of cash over these last few years
Tesla's significant investments in research and development are driving their innovation in the automotive industry By allocating ample resources, they aim to create groundbreaking vehicles, despite having few historical references to guide them.
Tesla's rapid expansion has significantly impacted its cash flow, with revenue soaring from $200 million to over $6.8 billion in just a few years Despite this impressive growth, the company's profit remains relatively low at $312 million, highlighting ongoing expenditures As recently as 2018, Tesla continued to prioritize spending to fuel its growth, emphasizing the challenges of balancing revenue with profitability.
In 2016, Tesla faced a significant debt of $2.5 billion, primarily due to capital leases; however, this figure has since been reduced to $920 million Despite this reduction, the company's ability to pay off its remaining debt remains uncertain, and if stock prices do not improve, it could jeopardize the jobs of one-third of Tesla's workforce.
Tesla's manufacturing capabilities are significantly smaller compared to its competitors, having initially operated from just one plant in California This limited production capacity posed challenges for the company in achieving higher vehicle output targets.
To enhance profitability, Tesla must first focus on reducing costs, which they are accomplishing through the construction of gigafactories These facilities enable the company to meet production targets and boost automobile output By manufacturing vehicles in large volumes, Tesla can leverage bulk purchasing discounts on materials, further driving down expenses.
For years, Tesla depended on its Fremont, California factory for vehicle production Fortunately, the company has successfully launched its first two Gigafactories, with a third set to be completed in May this year, enabling the production of a greater variety of models simultaneously.
Tesla is committed to revolutionizing the future of driving with environmentally friendly vehicles that reduce stress on the planet This dedication to sustainability resonates with eco-conscious consumers, although it also contributes to a somewhat unclear vision for the company's direction.
Tesla leverages its strong brand reputation and influence to lead advancements in eco-friendly and sustainable driving technologies, positioning itself as a frontrunner in the automotive industry.
Tesla is a groundbreaking automobile company that is transforming the future of driving With a commitment to producing luxurious and eco-friendly vehicles, Tesla caters to affluent consumers while also advancing the development of autonomous driving technology.
Financial health
Tesla Income Statement Evolution by Market Screener (2020)
Tesla annual income statement data (2020)
Key financial ratios
Liquidity ratios of Tesla Inc., 2016-2019, %
The company's liquidity is evident, as it can cover its current liabilities with its current assets Notably, the quick ratio has significantly increased from 0.54 in 2015 to 0.80 in 2019 Additionally, the current ratio exceeding 1 in 2019 indicates that the company possesses free current assets.
The table below shows the turnover ratios for the last five years
Turnover ratios of Tesla Inc., 2016-2019, %
The company's turnover ratios demonstrate significant growth, with inventory turning over more than six times in 2019, up from just over three times in 2016 Accounts receivable turnover was nearly 22 times in 2019, showing an increase from 21 times in 2016, although it decreased from over 29 times in 2018 Additionally, asset turnover improved to 0.77 times in 2019, rising from 0.46 times in 2016.
Capital structure ratios of Tesla Inc., 2016-2019, %
Total assets to equity ratio
Long-term assets to equity ratio
Tesla's total assets to equity ratio has shown significant fluctuations, peaking at 7.44 in 2015 and decreasing to 4.23 in 2019, indicating that the company's assets are over four times its equity This suggests a reliance on substantial debt to sustain operations Additionally, the high debt to equity ratio further reinforces the notion of considerable debt levels necessary for the company to remain viable The long-term assets to equity ratio highlights that Tesla does not primarily fund its long-term investments through its equity, as evidenced by the fact that nearly three-quarters of its non-current assets are financed through debt.
In 2019, the company's debt was 51 times greater than its equity, indicating that approximately two-thirds of its long-term investments were financed through debt This heavy reliance on borrowing suggests significant instability and poses a risk of bankruptcy for the company.
Profitability ratios of Tesla Inc., 2016-2019, %
The table indicates that the company's return ratios have been negative over the past five years, primarily due to sustained net losses However, in 2019, there was a notable improvement, as the losses decreased in relation to the company's sales, equity, and asset values.
Valuation
This valuation model utilizes competitors' multiples ratios to determine a stock's price, making it a straightforward tool for quick calculations It is particularly effective for comparing stocks within the same industry.
Price/LTM EPS Multiples Price/FWD EPS Multiple
Benchmark LTM P/E Ratio -22.3x Benchmark Fwd P/E Ratio 31.8x
Historical LTM P/E Ratio -39.4x Historical LTM P/E Ratio -39.4x
(x) LTM Net Income 368 Selected Fwd P/E 31.8x
(=) Equity Value 8,206 (x) Fwd Net Income 1,890
Implied Value Range 8.81 (/) Shares Outstanding 931.8
FX Rate: USD/USD 1.0 Implied Value Range 64.50
Implied Value Range 8.81 FX Rate: USD/USD 1.0
Fair value of Tesla using multiple valuation is $36.65 per share, much smaller than the current market price
6.6.2 Discounted Cash Flow Model (DCF)
This model imply that Tesla share is overrated with its intrinsic value of $174.55 per share, which is 61.2% smaller than its market value
Combining both models, we can conclude the Tesla stock target price is $159.98
GENERAL MOTORS
Company description
General Motors Company, formerly known as General Motors Corporation, was the world's largest motor vehicle manufacturer for much of the 20th and early 21st centuries Headquartered in Detroit, GM operates manufacturing and assembly plants, as well as distribution centers across the United States, Canada, and various other countries The company's primary products include automobiles, trucks, automotive components, and engines, and it also provides financial services.
Business model and strategy
General Motors employs a cost leadership strategy, as outlined by Porter’s model, which emphasizes gaining a competitive edge through low costs and affordable pricing By offering automobiles at prices lower than premium brands like Mercedes-Benz, GM attracts a broader customer base, thereby strengthening its market position To maintain this competitive advantage, the company focuses on improving manufacturing efficiencies through automation and continuous enhancement of processes.
General Motors primarily employs market penetration as its key growth strategy, aiming to boost sales within existing markets By enhancing their market reach, General Motors effectively drives company growth and strengthens its competitive position.
General Motors is enhancing customer access to its vehicles by expanding its dealership network, which now totals 55 locations The company employs a cost-leadership strategy to gain a competitive edge, enabling effective market penetration As part of its intensive growth strategy, GM aims to further develop its distribution network to support ongoing business growth and development.
Product development is a key secondary growth strategy for General Motors Company, driving expansion through the introduction of new products Each new product or product line has the potential to boost GM's revenue significantly This strategy aligns with GM's differentiation competitive approach, emphasizing the unique design and features of its offerings Consequently, General Motors aims to maintain a high rate of innovation in its product development efforts.
General Motors utilizes market development as a supporting intensive strategy to drive growth by entering new markets and segments This approach has been pivotal in the company's expansion into the global automotive industry, particularly through the addition of new countries to its operations However, given its extensive current operations, this strategy now plays a secondary role in overall business growth A key strategic objective is to penetrate new markets in Africa or innovate products to reach emerging market segments, thereby enhancing growth opportunities Additionally, implementing a differentiation strategy can provide the competitive advantage necessary to fully leverage the benefits of market development.
Diversification plays a crucial supporting role in General Motors' growth strategy, despite its low probability of implementation By pursuing diversification, the company can enhance its business through new ventures, such as acquiring a car rental service within the domestic market to drive growth This strategy not only introduces new business capabilities but also aligns with General Motors' differentiation competitive strategy A key objective related to this approach is to expand the company through acquisitions beyond the automotive sector.
SWOT analysis
Since its 2009 bankruptcy, GM has transformed into a major player in the global automotive industry, with new leadership prioritizing strict cost management and profit margins This approach has led to impressive returns for investors, as the company swiftly eliminates underperforming segments, such as its European manufacturing operations and the Vauxhall/Opel brands, if they fail to meet growth and sales targets.
The partnership approach adopted in relation to innovation has helped GM to effectively exploit both new market locations (e.g China) and market segments (e.g OnStar)
GM has diminished its market presence in Europe, a region that has struggled to provide sales growth and profitability for some time Despite this, Europe remains crucial for brand recognition and maintaining established political and commercial relationships If GM intends to re-enter this market, it must consider these factors.
In the future, the market for innovative products like the Bolt EV may present challenges for sales development, potentially leading to high costs and difficulties in achieving success.
Revenue generation is primarily concentrated in the North American market, focusing on established brands and services Although new markets, particularly in South America and China, are being explored, this reliance on a single market may reduce the business's resilience compared to competitors in the event of economic or political instability, such as rising unemployment rates.
GM's emphasis on efficiency and effectiveness is crucial for maintaining margins that facilitate the introduction of new product lines and drive innovation for market share expansion By adopting a more collaborative approach to research and development, GM is poised to create essential networks and partnerships, enabling the company to swiftly gain a competitive advantage in rapidly growing markets like China.
GM demonstrates a keen insight into leveraging connections between its core automotive products and the evolving social and lifestyle expectations of consumers This strategic approach could lead to significant growth in adjacent businesses, such as financial services and systems connectivity, if managed effectively.
General Motors (GM) heavily relies on the US market to support its growth and development goals Consequently, an economic downturn could jeopardize GM's current expansion and development initiatives, making them financially unfeasible This underscores the necessity for GM to establish a business model that appeals to consumers and investors alike.
58 shareholders (due to high capital returns) may mean that corporate reserves are not maintained at a level high enough to cope with any such eventuality
The reputational and financial impact of the faulty components scandal has been contained so far; however, potential civil and criminal claims could arise in the future If a similar incident occurs, especially in emerging markets like China, it could lead to significant harm to the brand and a substantial decrease in future profitability.
Financial health
General Motors Income Statement Evolution by Market Screener (2020)
Key financial ratios
GM operating margin compared to industry average by Dividend Stock Screener (2020)
The chart above shows GM operating margin from 2015 to 2020 on a trailing 12-month basis
The operating margin illustrates GM profitability from their core operations, which in this case are the company’s automotive and financial businesses
As shown from the chart above, GM’s operating margin has been on a decline in last 5 years and reached a low point of only 1% as of 2Q20
Despite a concerning decline in profitability numbers, GM's automotive operating profit remains significantly higher than the industry average, with figures approximately 2X-5X larger than GM Financial While larger profits might appear favorable, they do not inherently indicate greater profitability for the respective business segment.
At the end of 2020, General Motors (GM) reported a Return on Assets (ROA) of 0.71%, a Return on Equity (ROE) of 3.89%, and a profit margin of 1.46%, all of which are marginally above the industry averages.
Liquidity ratios are showed by the table below by Macrotrend (2020)
GM's current ratio has remained consistently below 1.0 in most quarterly results, suggesting that the company's total current assets have been insufficient to meet its short-term liabilities This trend indicates that GM may struggle to cover its short-term obligations with its available current assets.
The actual case was that GM has been able to deal with the liabilities that came due all the while
GM's strong cash flow generation allows the company to maintain minimal liquidity on its balance sheet while effectively covering its liabilities.
Instead, GM only needs to carry the right amount of cash to pay for all the debts that come due within a year
However, during the COVID-19 crisis which has badly affected the automobile industry, GM has shored up liquidy, causing the current ratio to tick significantly higher to nearly 1.1 in 1Q 2020
During the coronavirus crisis, General Motors (GM) significantly enhanced its liquidity, as evidenced by improved financial metrics including a higher current ratio, increased working capital ratio, and an elevated quick ratio in the first quarter of 2020.
Valuation
The competitor multiples valuation model is an efficient tool for assessing a stock's price by leveraging the ratios of similar companies within the same industry Its simplicity in calculation allows for swift comparisons between stocks, making it a valuable resource for investors.
Price/LTM EPS Multiples Price/FWD EPS Multiple
Benchmark LTM P/E Ratio 21.9x Benchmark Fwd P/E Ratio 31.8x
Historical LTM P/E Ratio 8.1x Historical LTM P/E Ratio 8.1x
(x) LTM Net Income 1,693 Selected Fwd P/E 17.1x
(=) Equity Value 30,305 (x) Fwd Net Income 3,987
Implied Value Range 23.54 (/) Shares Outstanding 1,431.1
FX Rate: USD/USD 1.0 Implied Value Range 47.64
Implied Value Range 23.54 FX Rate: USD/USD 1.0
Fair value of General Motors using multiple valuation is $18.6 per share, higher than the current market price
7.6.2 Discounted Cash Flow Model (DCF)
This model imply that General Motors share is overrated with its intrinsic value of $20.51 per share, which is 31.6% smaller than its market value
Combining both models, we can conclude the General Motors stock target price is $159.98
In conclusion, this paper values three representative companies – Toyota, Ford, Tesla and
An analysis of General Motors utilizing financial ratios and two valuation models indicates that Ford is currently the most attractive investment opportunity Consequently, investors are encouraged to consider purchasing shares in Ford Company.
The research highlights the cost-effectiveness and ease of implementation of the DCF valuation model, yet it acknowledges inherent limitations due to its reliance on future assumptions, which can lead to imprecise value estimates Notably, Tesla stands out among the analyzed companies due to its focus on new technology and its revenue dependency on consumer enthusiasm for CEO Elon Musk To enhance the findings, the study suggests exploring alternative valuation models tailored to each company, which could lead to identifying the most suitable approach based on specific industry conditions.
Stock Target Price Market Price Recommendations
Arthur (2020) Available online at: (https://industryeurope.com/sectors/automotive-maritime- transport/covid-19-could-have-a-lasting-impact-on-the-automotive-industry/)
Reynold (2020) (https://image-src.bcg.com/Images/Auto%20post%20COVID-19_052920_tcm9- 249607.pdf)
Ukessays(2019) https://www.ukessays.com/essays/marketing/automotive-swot- pestel.php#toyota-pestel
Mark (2018) https://www.counterpointresearch.com/weekly-updates-covid-19-impact-global- automotive-industry/
Notematic (2016) https://notesmatic.com/2016/09/automotive-industry-pestel/
The Five Forces Analysis of the automotive industry, as outlined by Notematic (2016), provides insights into the competitive dynamics and profitability of automobile manufacturers This analytical framework, developed by Michael Porter, helps identify key factors that influence market competition and sources of competitive advantage Understanding these forces is essential for automakers to navigate challenges and leverage opportunities in a rapidly evolving market According to Statista, the global market share of leading automakers highlights the competitive landscape, emphasizing the importance of strategic positioning for sustained growth Toyota's intensive growth strategies further illustrate how companies can effectively enhance their market presence and profitability.
Alex Foley (2020) (https://www.marketing91.com/swot-analysis-toyota/) http://panmore.com/general-motors-generic-strategy-intensive-growth- strategies#:~:text=General%20Motors%20uses%20market%20penetration,the%20number%20of