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P/E

What Do Auto Price Earnings Ratios Tell Us?

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            On October 24, 2018 Tesla announced its best quarter ever.  Sales rose to $6.8 billion from $4 billion the previous quarter.  Gross margin improved to 22.33% from 15.46% in the second quarter of 2018 and 15.05% in the third quarter of 2017.  Most importantly, earnings per share turned positive and reached a record level of $1.75 per share.
            With Tesla’s new-found profitability, for the first time it is possible to compute meaningful P/E ratios and to make comparisons with other auto manufacturers.  To do so I assume that Tesla earns the same $1.75 per share for the next four quarters.  Some might say it should be more because Tesla is a growth company.  Others may say it should be less because Tesla pulled out all the stops to be profitable in the third quarter, including selling only high margin Model 3s.  Those of you who disagree can alter the table below to reflect your own assumptions.
            The table reports the forward P/E ratios for Tesla and the other major auto manufacturers.  The first thing to note is that all the major manufacturers tend to trade around a forward multiple of 6.  Toyota is a bit higher at 8.33 and Fiat/Chrysler is a bit lower at 3.89, but not of them approach double digits.  In contrast, Tesla’s multiple is 47.19.  While one would expect Tesla’s multiple to be higher because of its greater growth opportunities, the gap is so large that it appears as if Tesla is in a different business.  It seems hard to believe that as Tesla matures its multiples will not drop toward the industry average.  If that happens, the growth in earnings will have to be dramatic to maintain the current stock price.
 
 

Looking for Value? Consider GM

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            Critics of this blog point out that almost all the valuations we have posted here reach the same conclusion – the securities in question are overpriced.  The most recent example is the ten bubble stocks.  At Cornell Capital, we agree with the critics.  Most every stock we evaluate, particularly the tech stocks, are either properly or overvalued in our opinion.  But there are exceptions.  As one example, consider GM.
            GM has streamlined operations, reduced the number of brands, improved the quality and design of its cars, cut pension expense, and become a leader in self-driving technology.  Despite all these improvements, GM is currently trading at $31.79, a price more than 10% below where it was five years ago.  Over the same period, the S&P 500 rose almost 60%.  At its current price, the forward P/E ratio is only 5.2.  It is not hard to see why value investors such as Warren Buffett and David Einhorn hold GM shares.  To be sure, GM faces challenges.  As we have stressed in our valuations of Tesla, the automobile industry is both highly competitive and capital intensive.  Nonetheless, it would hard to argue the GM is overpriced.  In our estimation, the fundamental value is significantly more than the price.