French automaker Renault – the largest worldwide when considered its strategic alliance with Nissan and Mitsubishi Motors – just reported outstanding results for the third year in a row.
Consolidated net earnings reached €3,5 billion in 2016. With a current market capitalization of €22 billion, the company trades for roughly six times earnings and a neat discount on book value of €30 billion.
Regardless, quality of earnings is poor and conventional accounting must be approached with caution in a capital-intensive, cyclical industry handicapped by extreme operational leverage and arduous management of inventories.
Last year, manufacturing activities generated €2,3 billion in operating earnings. 2017 is off to a flying start as sales grow meaningfully – another tangible proof of the economic upturn in Europe. Roughly valued for a conservative multiple of eight times its realized operating profit, Renault’s core business would be worth €18 billion.
The financing activities – which returns on equity would make any traditional lender green with envy, despite reasonable leverage – generated €905 million of earnings before interest and taxes. Let’s cut to the chase and count the business for zero – you’ve read that well.
Finally, Renault owns a 43% stake in Nissan – in addition of stakes in Daimler and Avtovaz, but let’s not suffer details and count these two for zero as well. Since the Japanese automaker currently trades at €35 billion, Renault’s stake is worth €15 billion at market value.
Nissan contributed €1,6 billion to Renault’s result last year: hence a valuation equivalent to less than ten times pre-tax earnings appears reasonable.
These three parts taken together weigh a total adjusted value of €33 billion euros. There is no debt to subtract since cash covers all long-term liabilities, provisions and pensions included. Once divided by the 274 million shares outstanding, fair value comes out at 120 euros per share.
The current price of 75 euros per share may thus entail a significant margin of safety.
(EDIT 11/19/2018: bought some shares at €56 as the scandal broke out but sold them four days later at €62 to pursue safer opportunities.)
Renault isn’t the sole automaker so ridiculously priced. Across the Rhine, BMW trades for a discount on book value and less than seven times consolidated earnings – a multiple flirting with all-times lows despite a sound capitalization and a spectacular history of growth and profitability, save for the more or less complete opacity within the financing division.
The venerable General Motors belongs to the same basket, as all eyes remain glued on Tesla and its charismatic CEO. Unmatched in scale, this staple of Americana keeps winning market share and does precisely the opposite of Tesla – that is, underpromising and overdelivering.
In the meantime, it pays a generous dividend and massively buys back in own stock – as the latter also trades for less than seven times earnings – while sporting one of the best balance sheets in the industry.
It is often said that simplicity embodies the ultimate sophistication. At their current prices, automakers’ stocks may very well prove this piece of wisdom true again.