Automakers are optimistic of Donald Trump’s presidency. They expect that the future policies of Trump will promote manufacturing of vehicles and lower costs concurrently. At an automotive testing center near Detroit, Trump addressed the concerns of manufacturers and indicated an auto boom ahead.
Trump announced the decision to re-examine the mid-term review of the agreement signed between automakers and the government in 2011, regarding the tough U.S. vehicle fuel-efficiency standards. The Obama administration fast-tracked the review process weeks before Trump was set to assume office and decided to maintain the strict regulations set earlier for 2022–2025.
Auto manufacturers and their associated groups, including the Alliance of Automobile Manufacturers and the Association of Global Automakers, have been lobbying the government to re-open the mid-term review as the process was rushed in January. The companies claimed that the cost of producing hybrids and electric vehicles is very high while demand for the same is low. The rising standards, set per the agreement, also pose a disadvantage to the high-demand pickup trucks and SUVs, affecting profitability.
Trump announced that the mid-term review would be put back on track and the Environmental Protection Agency (EPA) officials would be given time until Apr 2018 to re-evaluate the appropriateness of the standards. Per the agreement arrived at previously, automakers are required to increase the average fuel economy of cars and trucks in real-world driving to 36 mpg by 2025.
Obama’s administration projected costs of about $33 billion to the industry to meet the standards and Ford Motors Company (F - Free Report) CEO, Mark Fields, stated that about 1 million jobs would be at risk if the rules are not aligned with reality. While Trump’s decision has no immediate affect, the EPA will submit a new proposal next year if it determines the standards are not appropriate for 2022–2025.
AutoNation, Inc. (AN - Free Report) CEO, Mike Jackson, praised Trump’s decision, stating that the environmental measures put in place previously were “too extreme” for businesses.
Further, Trump stated that his administration remains focused on elimination of regulations that curb industry growth as well as lowering of taxes to promote job creation. He also ensured to keep in place regulations that protect the union workers’ jobs and auto factories, promising promotion of growth in the auto sector. Moreover, he stated that the existing “assault” on the U.S. auto industry has now ended.
Trump will also be reviewing trade deals, particularly NAFTA, that he believes has been adversely affecting the U.S. auto industry and its workers.
Quid Pro Quo
While Trump has been extending his support to the auto sector, he expects the manufacturers to increase employment as well as production in the U.S. However, automakers find it difficult to expand production as U.S. sales are expected to be nearing their peak.
Nevertheless, General Motors Company (GM - Free Report) also announced its decision to add 220 jobs at a plant in Romulus, MI, retain 180 jobs from a previously announced cut and bring back 500 jobs of a recently announced cut by 2018. The company stated that its plans were not related to decisions announced by Trump. Fiat Chrysler Automobiles N.V. (FCAU - Free Report) and Ford were praised by Trump for their recent job announcements.
Notably, automakers remain focused on technological development, introducing fuel-efficient initiatives and electric vehicles. The manufacturers are working toward lowering emissions and are looking for flexibility in timelines and targets through the review.
What Lies Ahead?
While the reevaluation does not mean any immediate reprieve for automakers, they are optimistic of Trump’s support to the industry. Moreover, while the government has stated that California’s efficiency rules, which are stricter than that of the EPA, will not be revoked, it might seek to withdraw the state’s authority in the future.
With Trump’s assurance of accelerated growth in the industry, automakers are likely to benefit during his presidency. Further policies related to lower taxes and regulations are expected to be accretive for the industry.
What do the Numbers Say?
While the Zacks classified auto sector has not outperformed the market at large over the last five years, a more value oriented path seems be ahead. Looking at the industry’s EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple, which is a good multiple for valuing automakers because of their capital-intensive business, investors could be interested in the sector.
The industry currently has a trailing 12 month EV/EBITDA ratio of 8.24. This level compares favorably with what the industry witnessed in the last five years. The ratio is lower than the midpoint of 9.52 and is significantly below its high of 13.42.
Moreover, it compares favorably with the market at large, as the current EV/EBITDA for the S&P 500 is at 10.96 and the median level is 9.08.
So while the sector is expected to perform well in the near future fundamentally, the low valuation multiple further increases the potential for an upside in the upcoming quarters.
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