And for the future?
Again, if you look at p/sales for a guide, auto makers are not an obvious bargain any longer. For instance Fiat's P/sales rose to 0,16, not expensive by historical standards, but within the long-term range (0,14-0,95); BMW's P/sales moved to 0.33 (close to a long-term average of 0,40); Peugeot's P/sales is just 0.094 (against a range of 0.15-0.30) but is burning a lot of cash. Renault has a P/sales of 0,18 vis a vis an average of 0.25, and Daimler is around 0.27 against an average of 0.45. So they are cheap, but not incredibly cheap as they were a couple of weeks ago. Volkswagen is the only company really expensive by this measure with a p/sales of 0.69 against a range of 0.09 and 0.54 between the mid 1980s and the mid 2000s.
In the context of a sector that is cheap, but not incredibly cheap, and is cheap but in a very negative economic environment, other considerations emerge. For instance, can this or that company stand their debt position? To illustrate: Morgan Stanley's Adam Jones thinks BMW is an underweight because "BMW has more debt than revenues, making it vulnerable to difficult refinancing conditions." And "BMW's financial services portfolio (auto loans and leases) is worth 4x its market capitalization and BMW has only written down 1/62 of the book."
Then, we have the political issue: Opel is the weakest player right now and might very well go out of business. Analysts say off the record that if OPEL fails, it would be a great development for the European auto sector because it would reduce overcapacity. In an interview with Spiegel Online, Volkswagen CEO Martin Winterkorn salivated at the idea that a European car producer could cease to exist: "If one player disappears from the field," he said, "the others will see their opportunities improve." Accordingly he was clearly against any bailout: "The government should stay out of it," he said.
But in September 2009, Germany has its general elections, so it is unlikely Opel goes bankrupt any time soon.
In the long-term, European auto makers will also benefit if GM, Chrysler or Ford go out of business or suffer a sharp reduction in activity. For this reason European car producers have no intention to cut their plans in the US. Again, Volkswagen CEO said he is not inclined to stop the construction of a new plant in the United States, where VW will build more than 150,000 additional cars. He said: "No, why should we (stop the construction)? I assume by 2011, when the plant goes online, the United States will have overcome its problems."
So, all in all, European auto makers are not the bargain they were a few weeks ago, although they remain cheap if the economy recovers and if a weak player reduces its market share so to mitigate the overcapacity of the industry, which according to Unicredit's Christian Aust is about 20-30%. But if market conditions and economic activity suffer a new downward leg, European car producers may report another break, perhaps making the sector a great bargain once again.
Disclaimer: the author's personal portfolio includes some 6,000 euros invested in Peugeot, average price paid 14.2.