What Is the Average Price-to-Earnings Ratio in the Automotive Sector?

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As of Q4 2019, the current price-to-earnings ratio (P/E ratio) was 77.57 for the auto and truck manufacturers sector. For the auto and trucks parts industry sector, the P/E ratio was 17.03.

Automotive Sector

The automotive sector is composed of companies that manufacture original equipment and automobiles, provide maintenance for automobiles, sell automobiles, or produce, manufacture, and sell spare parts and other vehicle components. The automotive sector is not only restricted to manufacturing and producing commercial vehicles and cars. Specialized industrial vehicles, automobile research and development, and auto finance are all included in this industry. The three largest companies that affect the sector’s performance in the United States are Ford (F), General Motors, and Fiat Chrysler.

Naturally, the automotive sector is an economic powerhouse in the global economy. As of 2019, there are approximately 1.5 billion cars in the world, which doesn’t include trucks, buses, and other automotive vehicles. However, car production has been slowing down since 2017, which would drastically bring down the global economy. The International Monetary Fund (IMF) has pointed to the automotive sector as an industry falling behind in output. In the latest figures from 2018, the automotive sector represented 20% of the global GDP’s slowdown and 30% in world trade. Stringent emission laws across the EU and China, trade wars between China and the U.S., and the costly shift towards electric cars, have dampened the industry.

Price-to-Earnings Ratio and the Automotive Sector

The P/E ratio is one of the most frequently used of all equity evaluation metrics. This ratio is calculated by dividing a company’s current stock price by the stock’s earnings per share (EPS).

There are two basic variations of the P/E ratio, and both are affected by how EPS is determined. The first, and most basic, is based on the reported quarterly net income from a company’s most recent 12 months. Using these figures generates a current or trailing P/E ratio. The other most common variation on the P/E ratio is the use of estimated, or projected, future EPS for the next 12 months. The ratio value is generated by using EPS values determined by investment research analysis. This is known as the forward P/E ratio.

High P/E ratios indicate positive expectations for company growth and increased earnings, however, it can also indicate that a company’s stock is overvalued. A company’s P/E ratio is best considered in comparison to that of similar companies, and viewed over an extended time period, to see a clear picture of a company’s long-term trend in P/E values and performance. Looking at historical performance enables investors to determine, for example, whether current or forward P/E values more accurately predict stock price performance.

The P/E ratio can vary significantly depending on the company. For example, as of Feb. 26, 2020, Ford has a P/E ratio of 723, General Motors (GM) has a P/E ratio of 7, and Fiat Chrysler (FCAU) has a P/E ratio of 5. Ford’s P/E ratio is uncharacteristically high due to the fact that their earnings per share is extremely low at 0.01. Ford lost approximately $1.6 billion in the fourth quarter of 2019 and came short of Wall Street’s earnings expectations.

The Bottom Line

Though the P/E ratio is a great valuation tool of a company, one needs to break down what the number is made of to get an accurate picture of the company’s future performance expectation, true stock value, and growth potential. The auto sector is made up of a variety of companies and comparing ones with the same profiles is essential when analyzing a specific ratio.

Source: Investopedia

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