Ford

  • 21 Apr
    An Investigation Into the Relative Cheapness of the Automotive Industry

    An Investigation Into the Relative Cheapness of the Automotive Industry

    • With a PE ratio of 5 to 10 the automotive industry looks attractive
    • The risks are that the industry is considered to be at a historical peak by most analysts
    • A global perspective gives a bullish outlook for the industry

    Introduction

    The automotive industry is usually called a cyclical industry, considered elastic in relation to GDP and vulnerable to economic shocks. According to a former Ford chief economist a normal recession reduces sales by 15%. With sales being reduced by 15% and costs being inelastic the decline in sales is the one that makes the difference between strong earnings and big losses. Any sign of a recession puts people off from buying new cars and makes them stick to the car they have for a little longer. Connecting the cyclicality and cost inelasticity with the current valuation for automotive companies brings to interesting conclusions. More →