The leading French manufacturer, thanks to the alliance with Nissan (progressively integrated by Mitsubishi Motors), is among the top three of the world's carmakers, is posting strong results, and has one of the best balance sheets in the automotive industry.
The group has just published a record quarterly result: 1.8 million vehicles sold (43% internationally), a 17% increase in revenues and an operating profit of 1.8 billion euros.
The consolidated profit reached 3.5 billion euros in 2016. At the time of writing this article, the market capitalization is 22 billion: the Renault group therefore trades at only six times its profit for the prior fiscal year - an abnormally low valuation for a large profitable capitalization - and clearly below the value of its equity (30 billion).
Naturally, the net result of a car manufacturer is a figure to be taken with a grain of salt. As discussed in the analyzes of General Motors and BMW (two other surprisingly discounted carmakers), cash profit, or "free cash flow" in analyst jargon, is a more relevant measure of earnings capacity – that is, the profit actually distributed to the shareholders.
Indeed, capital expenditure ("capex") by manufacturers is often higher than depreciation and amortization (Renault is no exception, although the gap is minimal in 2016). Not only are the maintenance and development of fixed assets (production capacity) subject to cyclical fluctuations, but the adjustments for working capital needs are colossal (due to the effect of changes in inventories).
Ultimate subtlety: activity is cyclical and the maximum operational leverage, capable of rapidly improving or depressing profits as a result of a (even tiny) variation in turnover, while the large share of sales made via the financing division blurs the picture.
In short, the management - and shareholders - of a car builder always walk on eggs. For us investors, income statements and cash flow statements are almost impossible to reconcile, especially when it comes to standardizing or projecting profitability.
The introduction made, we propose to value Renault exactly as we did for BMW
: via a sum of the parts, based on assumptions both cautious and rough - because is the words of stock market wisdom, it is better to be approximately correct rather than precisely wrong.
According to this method, we will divide Renault into three parts: manufacturing activity, financing activity (the most profitable), and the participation in Nissan.
In 2016, Renault's manufacturing activity generated operating profit of € 2.3 billion. The 2017 trend is encouraging, in clear progression. However it remains difficult to estimate at which point of the cycle we find ourselves.
By valuing this activity at only eight times its operating profits, we get a rounded amount of $ 18 billion.
The financing business realized 900 million of pre-tax profit (the equivalent of operating profit for a financial company). Let us make it easy and count this simply at zero.
This analysis is certainly extreme, and some would say absurd, but after all, recent years have not lacked examples of lenders racking up losses after a long series of record profits.
Renault finally owns a 43% stake in Nissan. The Japanese manufacturer is currently valued on the stock market to the tune of 35 billion euros. This participation is worth $ 15 billion in the market.
In 2016, Nissan contributed 1.6 billion to Renault's profit: a multiple of ten times pre-tax profit is conservative, and corresponds to market valuation.
Then we add together the three parts, a total of 33 billion. There is no debt to be deducted since the cash flow covers all long-term financial obligations (debts, provisions and pension plan).
This valuation of 33 billion divided by the number of shares (274 million) gives us an "equitable" value of 120 euros per share. Reported at a current price of 75 euros, there would therefore be a very substantial discount.
At a more mundane level, and to adopt an alternative viewpoint, applying a prudent multiple of eight times the operating result of the Renault group (manufacturing and financing taken together), there is a valuation of 25 billion, already more than market capitalization (22 billion). The participation in Nissan comes for free!
Regardless of the preferred method and the (admitted) vagueness of these back of the envelop calculations: with the caveat that Renault is spared from a carbon emissions scam or a major economic crisis, its stock appears largely undervalued.
Article published on 08/17/2017 | 04:37