1. Overview of the automobile sector

Five forces analysis

Competitive Rivalry between Existing Players: High

Competition between existing automobile companies is high. Although the automobile market was dominated by the three big auto manufacturers in US, Toyota and Honda in Japan, the situation is changed. With the growing demand in emerging market, the emerging competitors in China and India may drive an intensified price competition. However, the competition could also focus on the safety, warranty and financial services etc.

Threat of New Entrants: Medium

Although the entrant barrier is high for the automobile industry because the requirement of capital and technology, an increasing number of automobile manufacturers are emerging in China and Asia due to the economic expansion and growing demand. However, these automakers are in the development status and may not catch up the leading technology in Japan and US, so the threat from new entrants is medium.

Threats of Substitutes: Low

Customers could choose to switch to transportation means other than automobile such as bicycles, buses and subways. However, the automobile is still the favourite despite the relevant high cost than other mentioned transportation means because its flexibility, comfort and convenience.

Bargaining Power of Suppliers: Low

In automobile industry, the component supplier has little bargaining power because the manufacturer could switch to other suppliers easily. On the other hand, the components are generally low value and the suppliers find it difficult to bargain with automakers.

Bargaining Power of Customers: High

The competition in the automobile industry is intense as mentioned above. So the customers have many choices on the brands and models. Customers care about the quality, price, safety, comfort, appearance of the car. Recently, customers are also more and more concerned about the environmental effect of the automobile and the energy efficiency. So the customers get more and more bargaining power in automobile industry.

2. Toyota Motor Company

2.1 Overview of the company

Company profile

Toyota Motor Corp. is one of the largest and leading automobiles manufacturers in the globe. It operates in three main business segments; the two biggest are automobile and financial services whereas the third one is comprised by many smaller other divisions. It is spread worldwide as it has 50 manufacturing facilities in 27 countries and regions

Toyota designs, manufactures and sales passenger cars of several types and utilities, trucks, tractors and material handling equipment, minivans and other car accessories. Its products can be divided into 2 main categories, conventional and hybrid vehicles. The company sells its products under Toyota, Lexus, Hino and Daihatsu brands

The company is also engaged in the financial industry as it provides financing to its customers and dealers. It is also involved in housing, marine, e-commercial, ITS and biotechnological activities.

Toyota sells its vehicles in more than 170 countries and regions worldwide. Toyota's primary markets are Japan, North America, Europe and Asia. It is headquartered in Toyota City, Japan and employed around 316,121 people as on March 31, 2008

Strategy Analysis

Toyota's strategy can be summarised under three key principles; growth, efficiency and stability. These are the three priorities the company's management will pursue to achieve future sustainable growth and increase the economic value.

Growth will be achieved through continuous investment mainly in hybrid vehicle segment to meat the increasing demand. Efficiency is mainly focused on cost management and further reduction in order for the company to be able to provide high quality products in affordable prices and maintain its competitive advantages. Stability will be ensured by maintaining a solid financial base. Within the economic downturn it is important for Toyota to maintain sufficient liquidity in order to continue to finance its investments in research and development of new technologies, which is an integral and essential part of the company's advantages.

Peer Group

As Toyota operates in the global market its competitors come from all around the world. Its major competitors are BMW AG, DaimlerChrysler AG, Fiat S.p.A., Ford Motor Company, General Motors Corporation, Honda Motor Co. Ltd., PSA Peugeot, Renault S.A., Volkswagen AG and many others

SWOT Analysis

Strengths

Weaknesses

l Strong overall financial performance

l Strong reputation and quality

l Strong position is Asian market

l Research and development

l Production pipeline system and cost management

l Diversified product portfolio

l Financial services are still undeveloped

l Huge expenses on pensions and post-retirement benefits

Opportunities

Threats

l Increasing demand for hybrid and environmental-friendly cars

l Expansion in emerging Asian markets

l Financial and other non-auto division development

l New car models

l Global economic crisis

l Strong competition in automotive industry

l Yen and US dollar exchange rates

l Tight environmental regulations on carbon emissions

l Problems with specific components of sold cars. (Recent brake problem)

2.1. Key Financials Analysis

31/3/2009

31/3/2008

31/3/2007

31/3/2006

31/3/2005

Sales

207,852.40

264,120.58

202,821.01

178,294.05

173,443.60

Operating Income

-4,667.52

22,809.82

18,959.84

15,919.51

15,192.39

Net Income Available to Common

-4,423.79

17,259.05

13,923.62

11,629.63

10,950.45

Total Assets

292,725.95

324,979.61

275,051.76

242,604.35

227,515.08

Total Liabilities

185,398.39

199,132.47

169,488.89

148,104.55

138,230.49

Common Equity

101,865.07

119,249.79

100,242.15

89,502.94

84,563.86

Net Cash Flow Operating Activities

14,724.7

26,357.6

27,783.5

22,136.2

22,144.6

* IMPORTANT - First year to report losses

* Stable increase in sales - Decline in 2009 greatly affects income

* Severe decrease in cash flow from operating activities, nearly 50%

* Very big difference between sales and operating income points out severe cost expenses for the company. As this differences is constantly increasing it is not far from the truth to say that Toyota is gradually loosing its competitive advantages in cost efficiency against its competitors.

* General trend in key financial s shows a steady and permanent increase until 2008 and a sharp decline in 2009, due to severe problems of economic recession and its great impact on automobiles industry.

This trend applies for almost all financial s, pointing out that the company's performance as a whole followed a movement like this.

2.3. Multiples analysis

31/3/2009

31/3/2008

31/3/2007

31/3/2006

31/3/2005

Price To Earnings

-22.43

9.19

14.74

15.25

11.23

Price To Book

0.97

1.32

2.04

1.97

1.44

Price To Cash Flow

7.41

4.83

7.83

7.80

5.87

Price To Sales

0.5

0.7

0.8

1.0

0.7

* Multiples follow company's general trend, namely increase until 2007 and then decreasing sharply

* Consistent with overall picture of company, multiple analysis show the economic downturn of the entity from 2007 onwards

* Point to mention: negative P/E ratio. Market's expectation about company looks really slim. The economic crisis, alongside with its severe problems generating income and its recently damaged reputation, create really unfortunate future prospects for Toyota. The negative P/E ratio and specifically its magnitude (-22) implies that nobody is neither willing to pay to buy the company's share nor expecting any profit generation.

* Very sharp decline as well; 31.62 units is something extremely noticeable. If we focus on decline itself, it shows an extremely quick unfavorable turn of the market towards the company.

2.4. Company's performance

31/3/2009

31/3/2008

31/3/2007

31/3/2006

31/3/2005

Profitability

Return on Equity

-3.98

14.49

14.68

14.00

13.60

Operating Profit Margin

-2.25

8.64

9.35

8.93

8.76

Asset Utilization

Total Assets Turnover

0.71

0.81

0.74

0.73

0.76

Net Sales % Working Capital

28.93

180.70

1412.62

29.78

15.30

Gearing

EBITDA / Interest Expense

20.94

86.19

77.33

153.70

146.20

Long Term Debt/ Common Equit

62.63

50.40

52.92

53.41

55.44

Valuation - Investment

Earnings Per Share

-1.41

5.43

4.34

3.57

3.32

Dividend Yield - Close

3.21

2.82

1.59

1.40

1.63

Liquidity

Quick Ratio

0.81

0.77

0.76

0.81

0.87

Current Ratio

1.07

1.01

1.00

1.07

1.15

* Negative profitability in 2009

* Fluctuating sales/working capital as a result of fluctuation if investments (working capital)

* Gearing increase in 2009 at the same time with high decrease of interest cover

* Stable and quite low liquidity

2.5. Cash Flow analysis

31/3/2009

31/3/2008

31/3/2007

31/3/2006

31/3/2005

Cash Flow Operating Activities

14,724.7

26,357.6

27,783.5

22,136.2

22,144.6

Cash Flow Investing Activities

(12,265.3)

(34,254.0)

(32,727.4)

(29,704.4)

(28,591.6)

Cash Flow Financing Activities

6,967.4

6,242.7

7,565.6

7,716.8

3,917.0

Effect of exchange rates

-1,294.04

-749.27

218.18

604.94

232.09

Net Cash Flow

8,132.86

-2,402.99

2,839.91

753.58

-2,297.85

* Severe decrease in cash flow from operating activities, nearly 50% which vividly affects its operating income

* Extreme decrease in investing activities around 70%, probably caused by cash shortage and policy change. The company issued a new project with main goal to improve profits and cover operating expenses and as a result we see a large negative impact in new investments.

* Financing activities exhibit a stationary trend over the past few years indicating the stable financial policy of the entity.

* Adverse effects of exchange rates during the last two years indicating the risk the company runs because of the Yen's depreciation to the U.S dollar and the Euro.

2.6. Stock Performance

The company's share performance seems to move according to the index, with the trend to over perform it constantly. We can see the decline of the share's price, which started right before the end of 2008, following the global economic recession. At the turning point, which is in the beginning of 2009, we observe a relatively high trading volume, probably indicating the forthcoming upward movement. It is also really significant to point out the extreme high trading volume observed during the first months of 2010, followed by a new decline of the share's price. This reflects the problems that Toyota is facing nowadays. There is a considerable lack of trust from the market towards the company which is mainly caused by its severely damaged reputation and loss of quality.

3. Ford Motor Company

3.1 Overview of the company

A . Company profile

The group operates in two segments: Automotive and Financial Services. For the automotive segment which consists of Ford, Lincoln, Mercury and Volvo has a main operating activity in manufacturing, sale and service of component for cars and trucks.

The Financial services segment is included of financing, insurance and leasing regarding to cars, trucks, industrial equipment, construction equipment and other activities. The company has operation in North America, South America, Europe, Africa and Asia- Pacific.

B. Strategy Analysis

· One Ford

The Company has initiated the new strategy called “One Ford” which has detail as follow:

o ONE TEAM focuses the significant of team work in order to reach the automotive leadership. The measurement is satisfactory of business partners, employees, investors, and related companies.

o ONE PLAN: The four-step plan has been established which composed of: balance between cost structure and revenue; develop new product follow customer preference; develop balance sheet status and finance the plan; and cooperation around the world to leverage company's resources.

o ONE GOAL: That is “to create an exciting and viable company with profitable growth for all”.

Ford has started the restructuring business process before the economic crisis which the Company has reduced the excess capacity, closed some unprofitable plants and lower excess workforce. In addition, Ford has improved the product line in term of higher quality, more safety, use less energy and more economic.

* Affordable Fuel Economy: Focusing on deliver fuel efficiency engine to the market. For example, the 2010 Ford Fusion is now America's most fuel efficient midsize sedan for both the hybrid and conventional gasoline models.

* Electrification strategy: plan to bring pure batteryelectric vehicles, next-generation hybrids and a plug-in hybrid to market quickly and more affordably over the next four years.

* Safety leadership: Ford got totaling 16 models picked from the Insurance Institute for Highway Safety which more than other brands.

* EcoBoost™ Engine: delivers significant gains in fuel economy along with a great performance drive feel.

C. Peer Group

Ford's peer group is Daimler AG, Fiat Spa¸ Honda Motor Company Limited, Motors Liquidation Company, Nissan Motor Company Limited, Toyota Motor Corp and Volkswagen AG.

D. Ford's SWOT Analysis

Strengths

Weaknesses

l Wide geographic

Operate throughout the world and has a strong market in North America, Europe and Asia. Sales of each region of 2008 are 49%, 39% and 12% respectively. The well diversified market of ford reduces the risk of economic problem in specific area.

l Brand royalty

Ford has renowned reputation about quality and also owns other renowned brands such as Lincoln, Mercury and Volvo.

l Quality car

Ford owns totaling 16 models of car that rated as safety car by the Insurance Institute for Highway Safety

l Product Recall

Experienced many recalled products due to the quality of defective cruise control switch which may cause fire. Even though there is no fire cases reported but the Company's reputation is negative affected.

l Negative operating result

l Low gross margin

GSK's long-term debt increased by 115.5% in 2008, which may lead to problems such as heavy interest payment, risk of having too little working capital and even increasing possibilities of bankruptcy.

l Too much long-term debt

This may lead to problems such as heavy interest payment, risk of having too little working capital and even increasing possibilities of bankruptcy.

Opportunities

Threats

l Expanding market in emerging market

Ford has a plan to expand its sale in the emerging market which has great buying power in the future.

l Eco-friendly engine

Ford has high reputation in the eco-friendly engine such as hybrid engine which has very promising market.

l Fuel efficiency

Ford found another opportunity in the market for fuel-efficient in small and middle car.

l High competition

Due to new competitor, lower demand and excess capacity.

l Economic crisis

Economic crisis and regression in USA where is the main market of Ford caused severe effect to the Company.

3.2. Key Financial Analysis

Source: ThomsonFinancial

Scaling Factor : 1,000,000 USD

Currency: USD

12/31/08

12/31/07

12/31/06

12/31/05

12/31/04

Net Sales or Revenues

146,277.00

172,455.00

160,123.00

177,089.00

171,652.00

Operating Income

3,518.00

8,031.00

-8,167.00

7,010.00

10,681.00

Earnings Before Interest And Taxes (EBIT)

-4,885.00

6,792.00

-6,689.00

9,354.00

11,669.00

Interest Expense On Debt

9,682.00

10,927.00

8,783.00

7,643.00

7,071.00

Net Income Available to Common

-14,681.00

-2,764.00

-12,615.00

2,441.00

3,634.00

Total Assets

215,773.00

276,459.00

275,337.00

264,891.00

294,447.00

ST Debt & Current Portion of LT Debt

63,972.00

61,052.00

62,456.00

59,904.00

66,433.00

Long Term Debt

90,716.00

107,478.00

109,593.00

94,428.00

106,540.00

Total Liabilities

231,889.00

269,410.00

277,643.00

250,812.00

277,525.00

Common Equity

-17,311.00

5,628.00

-3,465.00

12,957.00

16,045.00

· Net sales decreased from 2007 about 15% as the economic crisis in the State which is the main market of Ford. The Company has had substantial losses from operation since 2006.

· Ford has high outstanding of long-term loan which may causes liquidity deficiency or bankruptcy if the Company still has continuously loss in the future.

· As a result of net losses from operation since 2006, Ford has had negative shareholder's equity since then.

3.3. Multiples Analysis

MONTHLY HISTORICAL MARKET PRICES

Y2008

Y2007

Y2006

Y2005

Y2004

January

6.64

8.13

8.58

13.17

14.54

February

6.53

7.91

7.97

12.65

13.75

March

5.72

7.89

7.96

11.33

13.57

April

8.26

8.04

6.95

9.11

15.36

May

6.80

8.34

7.16

9.98

14.85

June

4.81

9.42

6.93

10.24

15.65

July

4.80

8.51

6.67

10.74

14.72

August

4.46

7.81

8.37

9.97

14.11

September

5.20

8.49

8.09

9.86

14.05

October

2.19

8.87

8.28

8.32

13.03

November

2.69

7.51

8.13

8.13

14.18

December

2.29

6.73

7.51

7.72

14.64

.

5 Year

5 Year

VALUATION

Y2008

Y2007

Y2006

Y2005

Y2004

Y2003

Growth Rate

Average

P/E Ratio (High)

-1.36

-6.93

-1.41

12.94

9.63

34.66

-1.04

2.57

P/E Ratio (Low)

-0.16

-4.75

-0.90

6.64

7.01

13.16

-1.01

P/E Ratio (Close)

-0.35

-4.81

-1.12

6.77

8.13

32.00

-1.01

1.73

Price/Sales

0.04

0.08

0.09

0.09

0.18

0.18

-0.80

0.10

Price/Book Value

-0.32

2.62

-4.14

1.14

1.74

2.62

-3.94

0.21

Price/Cash Flow

0.44

1.24

1.76

0.70

1.11

1.35

-0.67

1.05

Price/Working Capital

0.00

0.00

0.00

0.00

0.00

0.00

-0.16

7.78

TARenderChart.png

* P/E ratio turned to be negative since net losses from operation since 2006 and also the market price has continuously decreased from 8.58 in the beginning of 2006 to 2.29 at the end of 2008.

* P/B ratio had negative value in 2008 from the negative book value of Ford.

3.4. Company's performance

Worldscope

Currency: USD

PROFITABILITY RATIOS

12/31/08

12/31/07

12/31/06

12/31/05

12/31/04

Return On Invested Capital

0.25

1.92

1.95

2.95

3.32

Operating Profit Margin

2.43

2.94

3.12

5.02

6.54

ASSETS UTILIZATION RATIOS

Asset Turnover

0.63

0.60

0.59

0.59

0.58

Net Sales Pct Working Capital

10.62

6.21

5.68

11.06

41.64

LEVERAGE RATIOS

EBITDA / Interest Expense

-0.50

0.62

-0.76

1.22

1.65

LT Debt Pct Common Equity

-76.88

233.49

316.38

1,268.12

1,229.66

LIQUIDITY RATIOS

Quick Ratio

1.05

1.08

1.12

1.08

1.03

Current Ratio

1.21

1.25

1.30

1.25

1.19

· Profitability ratios do not show the good performance as Ford has had net loss from operation since 2006.

· Leverage ratios also go in the same trends as a result of negative equity and high outstanding balance of long-term loan.

· Liquidity ratios present that Ford still can generate cash to supply its working capital but if consider to the long-term debts Ford may cannot provide enough cash to support its debt payment since these ratios are still in the low range compared with its debt outstanding amount.

3.5. Cash flow analysis

Source: ThomsonFinancial

Scaling Factor : 1,000,000 USD

Currency: USD

12/31/08

12/31/07

12/31/06

12/31/05

12/31/04

Net Cash Flow From Operating Activities

-179.00

17,074.00

9,609.00

21,674.00

22,591.00

Net Cash Flow From Investing Activities

3,143.00

6,457.00

24,862.00

-7,462.00

8,567.00

Long Term Borrowings

42,163.00

33,113.00

58,258.00

24,559.00

22,223.00

Inc(Dec) In ST Borrowings

-5,120.00

919.00

-5,825.00

-8,591.00

4,937.00

Reduction In Long Term Debt

46,299.00

39,431.00

36,601.00

36,080.00

36,021.00

Net Cash Flow From Financing Activities

-9,104.00

-5,242.00

15,273.00

-20,651.00

-14,226.00

· The Company cannot generated sufficient cash from operation and had negative net cash flow from operation. Moreover the Company had to pay interest expenses for loans and had high net cash paid for financing activity.

3.6. Stock market performance

· Ford shares have been traded lower than SP500 since 2001 until 2010. Especially since 2006 that the operating results had continuous substantial losses.

4. Honda Motor Company Limited

4.1. Introduction

Honda Motor is one of leading automobile manufacturers in the world. The company develops, manufactures and markets automobiles, motorcycles and power products. The company also provides financing services to the dealer and customer for the sale of products. Honda has global operations in areas including North, South and Central America, Asia, Middle East, and Europe with its headquarter at Tokyo in Japan.

Strategy analysis

Honda Motor has three strategies. They are “Staying Close to Customers”, “glocalization” and “five region strategy”. Staying close to customers mean the maintenance of the qualities of a small company, Provide value product with flexibility and efficiency as a small company does and maintain global reach and technology advantage as a large company does is the drive to the future growth of Honda. Glocalization means the effort to launch subsidiaries in regions that could best meet the demand of local customers and expand the subsidiaries as the local demand increases. Five region strategy requires the operations focus on five areas the world. They are North America, South America, Europe/Middle East/Africa, Asia/Oceania and Japan. The management decisions are served to suit the situation in different areas. The advanced R&D capacity equips the Honda to provide flexible products to adjust the need of these regions.

Business activities

The company operates through four business segments: the automobile business, motorcycle business, financial services, and power products.

The automobiles business division manufactures passenger cars, multi-wagons, minivans, port utility vehicle, sports coupe and mini vehicles. Honda's automobiles use gasoline engines of three, four or six-cylinder, diesel engines and gasoline-electric hybrid systems. Honda also offers alternative fuel-powered vehicles such as natural gas, ethanol, and fuel cell vehicles. In 2008, the company sold 3,925,000 units of automobiles.

The motorcycle business produces a range of motorcycles, including scooters, electric-motor-assisted bicycles, sports bikes and large touring cycles. Honda's motorcycles use gasoline engines developed by Honda that are air or water cooled, two or four cycled, and single, two, four or six cylinder. In 2008, the company sold a total of 9,320,000 units of motorcycles.

Honda offers a variety of financial services to its customers and dealers through its widespread finance subsidiaries.

Honda's power products manufactures a variety of power products including power tillers, portable generators, general purpose engines, grass cutters, outboard engines, water pumps, snow throwers, power carriers, power sprayers, lawn mowers and lawn tractors (riding lawn mowers). Honda also manufactures the major components and parts used in its products, including engines, frames and transmissions.

Peer Group

The globalization of the Honda motor makes it face the global intense competition. The competitors include Ford Motor, Nissan Motor, Toyota Motor, Volkswagen etc.(in the automobile sector) and Yamaha Motor, Harley-Davidson etc.(in the motor vehicle industry).

SWOT Analysis

Strengths

Weaknesses

l Global diversification

The company operates a total of 397 subsidiaries, and 104 affiliates all over the world.

l Leading market position and good brand image

Honda is one of the largest vehicle and motorcycle manufacturers over the world with strong brand strength.

l Strong Research and Development capacity

The large investment in R&D could equip Honda the capability to differentiate itself in the intense competitive market.

l Declining Market Share in Sector

Evident of decline in unit sales and lost of market shares in the automobile industry.

l Low employee productivity

Honda has a weak proportion on the number of employees and the revenues.

Opportunities

Threats

l Growing demand in Asian market

Honda has taken measures to occupy the huge potential Asian market.

l Growing demand in hybrid electric vehicles

The company's emphasis on hybrid technology innovation will capture market trends as an opportunity to enhance its market share.

l Global competition

The competition would result in price pressure and thus reduce the profitability.

l Tightening emission regulations

The emission standards will cause Honda to occur more costs in product development, testing and manufacturing process design.

4.2. Key Financials Analysis

Source: ThomsonFinancial

Currency: JPY

Scaling Factor : 1000000 JPY

31/3/2009

31/3/2008

31/3/2007

31/3/2006

31/3/2005

Sales

10,011,241.00

12,002,834.00

11,087,140.00

9,907,996.00

8,650,105.00

Operating Income

189,643.00

953,109.00

851,879.00

730,889.00

630,920.00

Net Income Available to Common

137,005.00

600,039.00

592,322.00

597,033.00

486,197.00

Total Assets

11,579,494.00

12,439,610.00

11,964,917.00

10,533,995.00

9,187,808.00

Total Liabilities

7,449,150.00

7,753,539.00

7,359,399.00

6,320,785.00

5,828,513.00

Common Equity

4,007,288.00

4,544,265.00

4,482,611.00

4,125,750.00

3,289,294.00

Net Cash Flow Operating Activities

383641

1126918

904525

576557

746624

l The operating income reduces dramatically, approximately 80% from the previous year's result. This result is caused by the severe decline in the sales and the consequently increase in inventory cost.

l Before 2009, all the s are in a healthy and steady upward trend. But in the fiscal year ended at 31st march 2009, the volumes all experienced a dramatic decline. They are caused by the sales plunge.

l The declines trends are due to the economic recession caused by the financial crisis because the demand in Japan, US and Europe shrank. The automobile industry faces a severe challenge and most companies in the sector reported unsatisfactory results.

4.3. Multiple analysis

31/3/2009

31/3/2008

31/3/2007

31/3/2006

31/3/2005

Price To Earnings

30.7

8.6

-

-

10.3

Price To Book

1.0

1.1

-

1.6

1.5

Price To Cash Flow

4.6

4.2

-

-

6.8

Price To Sales

0.4

0.4

0.7

0.7

0.6

l Although the P/E ratio increases significantly, it's not a good sign. The increase in P/E ratio is not due to the high expectation of the investors and the fundamentals such as growth opportunities. Instead, the soaring P/E is the result of the plummeting earnings to common shareholders.

l The price to book ratio and price to sales declined in 2008 and 2009, indicating the declining expectation of the investors and the slowdown of the growth trend.

4.4 Company's performance

03/31/2009
JPY

03/31/2008
JPY

03/31/2007
JPY

03/31/2006
JPY

03/31/2005
JPY

Operating Profit Margin

1.9

7.9

7.7

7.4

7.3

Return on Equity

3.20%

13.29%

13.76%

16.10%

15.78%

Long Term Debt / Equity

48.2

40.4

42.5

45.5

47.4

EBIT/ Interest Expense

8.2

54.9

62.4

70.7

58.3

Quick Ratio

0.6

0.7

0.8

0.8

0.7

Current Ratio

1.1

1.1

1.2

1.3

1.1

EPS

75.50

330.54

324.62

324.33

260.34

Dividend Yield

2.72%

3.02%

1.63%

-

1.21%

Total Asset Turnover

0.9

1.0

0.9

0.9

0.9

Net sales per working capital

21.62

21.53

26.57

-43.54

-54.62

 

l The companyHonda Motor's ROE reached the lower point since 2000 due to the negative trend in its operations (net income). This trend is caused by the shrinking unit sales and market share.

l The gearing maintained the previous level but due to plummeting revenues and net income the interest cover appeared to be a bad index.

l The productivity of Honda's assets decreased year by year: the asset turnover suffered an overall downtrend because the demand in automobile sector in the Japan, Europe and US market decreased.

l Price and book value have been on a parallel downward situation due to the dramatic decline in sales. P/E ratio suggests a more severe decline of earnings. Similarly, the dividend yield experienced the same trend.

4.5. Cash flow analysis.

31/3/2009

31/3/2008

31/3/2007

31/3/2006

31/3/2005

Net Cash Flow Operating Activities

383641

1126918

904525

576557

746624

Net Cash Flow Investing Activities

1133364

1686399

1130704

672701

807853

Net Cash Flow Financing Activities

530862

688001

423410

24006

97495

l The net cash flow from operating activities declined to a large extent. The accounting policies are consistent with previous practice and the result is mainly due to the plunge of the sales revenue.

l The cash flow from investing activities increase as the result of the disposal of assets. On the other hand, Honda increased the capital expenditure, in which R&D expenditure and subsidiary expansion as an important source.

l The cash flow from financing activities maintained the previous level, indicating the Honda did not change the financing policy of the company. But Honda reduced the short-term borrowing and emphasise the long-term borrowing. Also, Honda reduced the short-term investment largely probably because of the volatile investing environment in 2009.

4.6. Stock performance

03/31/09

03/31/08

03/31/07

03/31/06

03/31/05

Price(close)

2315.00

2845.00

4110.00

1822.50

1342.50

Price Change (Yr/Yr)

-530.00

-1265.00

2287.50

480.00

142.50

Dividends

63.00

86.00

67.00

25.00

16.25

Shares Outstanding

1814.61

1814.54

1821.99

1826.15

1849.74

The price for Honda experiences a steady growth before the boosting effect in 2006. The investors were confident about the company's prospect because of its leading position in the automobile sector and the booming of the automobile demand. In the year 2006 the Honda stock price illustrates a considerable increase (close price at JPY 4110.00 on March 31st 2007). After that, as the global finance crisis and the impact on automobile industry, the profitability of the company declined and investors are suspicious at the future performance. The price decreased in the following two years and reach the level lower than 2004 and 2005. but the dividend did not experience the same dramatic downward trend because the company want to maintain the investors' confidence at the company.

5. Volkswagen AG

5.1. Company overview

Volkswagen Group is a German automobile manufacturing group; and according to s published by automotive industry analysts Global Insight in November 2009, is the largest automobile maker in the world by vehicle production.

The Group's principal activities are to design, manufacture and distribution of cars and other vehicles worldwide. The Group's activities are carried out through two divisions: Automobile and Financial services. The Automobile division comprises the development of vehicles and engines, as well as the production and sale of passenger cars, commercial vehicles, trucks and buses. The Financial Services includes dealer and customer financing and leasing, banking and insurance activities, vehicle rentals and the fleet management business. Group consists of 342 Group companies, which are involved in either vehicle production or other related automotive services.

Volkswagen Group's core market is primarily Europe. Of its automobile brands, Volkswagen Passenger Cars is its mainstream marque, and the Group's major subsidiaries also include well-known car marques like SEAT, Skoda, and the prestige marques of Audi, Lamborghini, Bentley, and Bugatti. The Group also has operations in commercial vehicles, owning Volkswagen Commercial Vehicles, along with a controlling stake in Swedish truck and diesel engine maker Scania AB, and a 29.9% stake in MAN SE. Volkswagen's second-largest market is China, where its subsidiary, Volkswagen Group China (VGC), is by far the largest joint venture automaker, selling more than one million vehicles in 2008.

Strategy

The Volkswagen Group focuses on becoming an economic and environmental leader in the global automotive industry. Innovative ideas and technologies are the basis for the Volkswagen Group's growth and business success. ‘Driving ideas' is the motto dominating the philosophy and actions of group. The focus is not just on what's technological possible -an innovation is only truly good if it generates real added value for the customer and can be implemented in harmony with environment.

Today more than ever, global challenges such as climate change and scarce resources demand sustainable solutions from industry and society that go beyond the usual boundaries of sectors and segments. As a globally active Group, Volkswagen is addressing these challenges with a commitment to using them as an opportunity to develop convincing solutions and use the findings in its strategic positioning. For many years now the Volkswagen Group has been employing various methods to envisage the future and thereby enhance its competitive position.

The Volkswagen Group's "18plus" strategy

The company is being equipped to face the future: attractive new models and vehicle segments, as well as innovative environmental technologies point the way forward for increasingly economical internal combustion engines and gearboxes, for hybrid and electric vehicles and for second generation biofuels. Commercial success must invariably go hand-in-hand with an intact environment and good corporate citizenship.

The basic position remains that, Volkswagen Group acts responsibly towards our customers, our shareholders, our employees and towards society.

The Volkswagen Group's strategy 2018

The Volkswagen Group is pursuing the long-term goal of firmly anchoring the Volkswagen Group among the most successful automakers in the world. This applies in terms of profitability, customer satisfaction and quality, of accessing new markets and increasing our production output, and of our attractiveness as an employer.

“We aim to be the most eco-friendly automaker in the world!”

Business activities (Recent acquisitions)

1.Wilhelm Karmann GmbH

Volkswagen Group revealed on 24 October 2009 that it had made an offer to acquire long-time partner and German niche automotive manufacturer Wilhelm Karmann GmbH out of bankruptcy protection. In November 2009, the Supervisory Board of Volkswagen AG approved the acquisition of assets of Karmann, and plan to restart vehicle production at their Osnabrück plant in 2012.

2.Dr. Ing. h.c. F. Porsche AG

In December 2009, Volkswagen AG bought a 49.9% stake in Dr. Ing. h.c. F. Porsche AG (more commonly known as Porsche AG) in a first step towards an 'integrated automotive group' with Porsche. This was agreed between Volkswagen AG and Porsche SE during negotiations on the contracts of implementation relating to the merger of the two companies. The merger of Volkswagen AG and Porsche SE is scheduled to take place during the course of 2011.

3.Suzuki Motor Corporation

Volkswagen AG completed the purchase 19.9% of Suzuki Motor Corporation's issued shares on 15 January 2010. Suzuki intends to invest up to one half of the amount received from Volkswagen into shares of Volkswagen.

SWOT analysis

Strengths

Weaknesses

1.VW has boosted quality more than any other competitors in the past five years, cutting defects by 60% ·
2.In the US, VW almost outperformed GM ·
3.VW managers attend test drives, and therefore know exactly their different products.
4. A non-stop innovation for the new projects.
5. Cost-control is the important strategy for the company which helps the company outperformed in the sector.

1.VW still trails Toyota, Mercedes, Nissan, and Honda in overall quality ·
2.VW's cost of capital is relatively higher.

Opportunities

Threats

1. Growth potential in the American market.
2. VW may expect to attract numerous new investors because of its very good results on the stock exchange,

3. Potential cost decrease with their production strategy.

1.Risk of self-cannibalization between VW's brands, like top of the line VW's models and bottom of the line Audi's.
2. Risk of brand dilution, confusion between the VW Passat and the Audi A4.

5.2. Key financials analysis

Key financials

12/31/2008
EUR

12/31/2007
EUR

12/31/2006
EUR

12/31/2005
EUR
restated

12/31/2004
EUR
restated

Sales

113,808.0

108,897.0

104,875.0

93,996.0

88,963.0

Operating EBIT

3,627.0

4,623.0

2,061.0

620.0

255.0

Net income to shareholders

4,753.0

4,120.0

1,954.0

1,120.0

693.0

Total assets

164,575.0

142,248.0

133,565.0

130,209.0

124,916.0

Total liabilities

127,187.0

110,310.0

106,606.0

106,562.0

102,235.0

Common equity

35,011.0

31,875.0

26,904.0

23,600.0

22,634.0

Operating cash flows

10,799.0

15,662.0

14,470.0

-

-

l Stable increase in sales although most of the peer group witnessed a slight decrease.

l Operating EBIT and cash flows declined in 2008 after there years increased.

l General trend shows a steady increase during these five years which implies a stable market position and potentials of growth in the future.

5.3. Multiples analysis

12/31/2008
EUR

12/31/2007
EUR

12/31/2006
EUR

12/31/2005
EUR
restated

12/31/2004
EUR
restated

Price To Earnings

20.9

15.0

17.1

-

18.5

Price To Book

2.9

1.9

1.3

0.7

0.6

Price To Cash Flow

6.9

3.8

2.5

-

-

Price To Sales

0.9

0.6

0.3

0.2

0.1

l Multiples follow company's general trend and especially, in 2008, P/E ratio and Price to cash flow ratio witnessed a obvious increase which indicated the good performance of the company and its strategy of focusing on the products.

5.4. Company's performance

key ratio

12/31/2008
EUR

12/31/2007
EUR

12/31/2006
EUR

12/31/2005
EUR
restated

12/31/2004
EUR
restated

Profitability

 

 

 

 

 

Return on equity

14.21%

14.02%

10.89%

4.84%

2.80%

Operating profit margin

3.19%

4.25%

1.97%

0.66%

0.29%

Asset Utilization

Total asset turnover

0.7

0.8

0.8

0.7

0.7

Sales to capital employed

10.02

8.75

13.54

21.00

13.23

Gearing

EBIT/Interest expense

7.6

7.3

3.1

3.0

2.5

Long-term debt/common equity

95.0

92.0

106.8

131.4

143.0

Valuation - Investment

EPS

14.28%

107.33%

72.93%

61.38%

(38.17%)

Dividend yeild

0.77%

1.15%

1.45%

-

-

Liquidity

Quick ratio

0.8

0.9

0.9

0.8

0.9

Current ratio

1.2

1.2

1.1

1.1

1.1

The starting point for the systematic analysis of the firm's performance is return on equity (ROE). As we can see from the table above, Volkswagen's ROE ratio witnesses a slight increase from 14.02% in 2007 to 14.21% in 2008. Meanwhile, when we compare the ratio in 2005 with 2008, it increased more than 10% which is a big progress. It also implies that the strategy of the company which is ‘in terms of profitability, customer satisfaction and quality, of accessing new markets and increasing our production output, and of our attractiveness as an employer.' shows a positive impact. There are three drives that can be used as the interpretation of the changes of ROE. From 2007 to 2008, both operation profit margin and total asset turnover decreased slightly. While financial leverage ratio such as long-term debt/common equity increased obviously. Since it is a main force of the increasing ROE that might be the result of the group's expand their business around the world and the acquisition and merger performance.

EPS and Dividend yield showed a big decrease in 2008. That might be the response to the decrease of the operating profit margin and total asset turnover. The global financial crisis influences the economic situation around the world and most of the industries which has a negative impact on VW also.

The liquidity ratio such as quick ratio and current ratio which measure the firm's ability to repay its current liabilities almost remain the same in these five years. It is a good indicator for the company's comfortable liquidity situation.

5.5. Cash flow analysis

Cash flow

12/31/2008
EUR

12/31/2007
EUR

12/31/2006
EUR

12/31/2005
EUR restated

12/31/2004
EUR restated

Net Cash Flow - Operating Activities

10,799.0

15,662.0

14,470.0

10,810.0

11,494.0

Net Cash Flow - Investing

(19,280.0)

(15,202.0)

(12,893.0)

(11,353.0)

(14,796.0)

Net Cash Flow - Financing

8,123.0

178.0

(114.0)

(1,794.0)

5,968.0

Net operating cash flow witnessed a decrease from 2007 to 2008, although the net income increased from 6543.0 to 6608.0. This might be the reason of the increase of the inventory cash flow. At the same time investing cash flow showed a huge increase in 2008 and the financing cash flow as well. This s consistent with the leverage ratio listed in the pervious discussion.

5.6. Stock Performance

12/31/08

12/31/07

12/31/06

12/31/05

12/31/04

Price/Cash Flow Ratio

6.93

3.80

2.53

1.45

1.20

Cash Flow per Share

50.19

60.12

44.82

36.39

37.64

Free Cash Flow pe Share

23.63

41.08

22.02

12.46

9.49

Price Close

250.1

156.4

86.0

44.7

33.4

% Change

59.88%

81.98%

92.35%

34.00%

(24.80%)

Total Return

61.11%

84.07%

95.14%

37.45%

(22.44%)

6. Renault SA

6.1 Overview of the company

A. Company profile

Renault has a major position in the Europe's automobile industry. It owns the Dacia and Samsung Motors brands and has contracted an alliance with Nissan Motor. Renault has become the owner of Dacia (Romania) and the Renault Samsung Motors of South Korea. The company operates in 118 countries including Europe, Americas, Asia and Africa and is headquartered in France.

Business Segments

* Automobile

The company in engaged with the design and production of passenger cars and light vehicles. It also produces gasoline engines.

* Sales Financing

The company provides sales financing for Renault and Nissan brands. Renault is involved also with leasing, long-term rental as well as with the supplement of loans for the purchase of vehicles.

Performance

Renault reported revenues of $55,603.40 million in the FY2008 that account for a 7.1% decrease compared to the revenues of FY2007.

Revenues by Division

* Automobile: $52,610.70 million (FY08), 7.6% decrease compared to FY07

* Sales Financing: $2,992.7 million (FY08), 1.5% increase compared to FY07

B. Strategy Analysis

Renault Group's strategy incorporates three main targets:

· High Quality. Be recognized by the clients as being one of the best three automobile companies.

· Leader in Key Technologies, R&D, Development of Hybrid electric Vehicles.

· High Operating Profit Margin & Steady Growth.

C. Peer Group

Top Competitors

* AB Volvo

* Suzuki Motor Corporation

* Fiat S.p.A

* Toyota Motor Corporation

* Ford Motor Company

* Volkswagen AG

* Honda Motor Co., Ltd

* Daimler AG

* Mitsubishi Motors Corporation

* Hyundai Motor Co.

* PSA Peugeot Citroen S.A

D. SWOT Analysis

Strengths

Weaknesses

l Renault-Nissan Alliance leads to reduction of the cost of both companies and increase of competitiveness.

l The Global Operations smoothen the effect of a failure in a single market. Cost reductions- economies of scale.

l Concentration on R&D enhances Innovation and the development of new products that will boost the Sales.

l Environmentally friendly practices. NOxtrap model transforms nitrogen oxides into neutral gas.

l Safety leads to good Reputation. New Megane model was awarded with 5 stars

l Lower Operating Profits compared to the competitors'.

l Lower Credit Ratings that reflect higher borrowing costs and not easy access to capital markets.

Opportunities

Threats

l Expansion in India and China is going to enhance the company's profitability and growth.

l Plan for the launch of eight new models in FY2009 will boost the revenues.

l Increasing Demand for Hybrid Electric Vehicles. Renault along with Nissan has been in the process of developing such environmentally friendly vehicles.

l Recession of global automobile industry

l Strict Emission Standards. The emission standards adopted across various countries can incur additional costs for the product development and manufacturing operations of Renault.

l Intense Competition among Companies.

6.2. Key Financial Analysis (USD in millions/ Tomson OneBanker)

31/12/2008

31/12/2007

31/12/2006

31/12/2005

31/12/2004

Sales

52,532.84

59,476.93

54,760.06

48,761.43

55,339.55

Operating Income

492.09

2,204.69

1,401.70

1,560.58

3,256.63

Net Income

793.74

3,902.07

3,783.15

3,971.64

4,826.50

Total Assets

88,380.44

99,383.58

90,363.06

80,331.68

81,527.13

Total Liabilities

61,390.48

67,118.78

62,406.79

57,139.98

59,868.38

Operating Cash Flows

-337.79

6,937.17

3,409.98

5,998.16

6,737.52

According to table above, 2007 was a prosperous year with the accelaration of sales and thus the increase in the operating cash flows. This optimistic image can be attributed to the growth of the sales in the international context and the significant reduction of the manafacturing and logistics costs. The company's declining operating income reflects mediocre cost management and bad decision making. The total assets increased gradually till 2007 in combination with a relevant increase in non-current assets and the inventories, according to the balance sheet. The total liabilities followed an increasing trend between 2005 and 2007 that is owing to the rise in current items, such as short term obligations. In 2007, the company devoted great amounts of money for restructuring reasons. The fall in volume and the reduction in production in order for the company to decrease the inventory, had a negative effect in the cash flow coming from operations. The negative impact of the strong yen and the lessening consumer confidence contributed also to the bad financial results in 2008.

6.3. Multiples Analysis

31/12/2008

31/12/2007

31/12/2006

31/12/2005

31/12/2004

Price/Earnings

8.32

9.40

8.15

5.22

5.52

Price/Sales

0.14

0.66

0.63

0.46

0.42

Price/Cash Flow

1.44

5.29

6.34

3.93

3.11

Price/Book Value

0.27

1.25

1.23

0.99

1.09

The Price per Earnings Ratio declined till 2006 whereas in 2007 it rose to 9.40 and then fell to 8.32 in 2008. The low s of the 3 first years reflect the lower profits compared to next years. The highest of 2007 indicates that the market was willing to pay more for each dollar of annual earnings, compared to the other years. In 2007 the sales were boosted but then the economic crisis led to a lower PE ratio.

The Price per Sales Ratio increased from 2004 to 2007 and then it fell sharply to 0.14. This trend means that till 2007 the investors were willing to pay more money for every dollar of the company's sales. The economic crisis in 2008 makes the investors more conservative.

The Price to Cash Flow Ratio increased from 2004 to 2006, it then fell from 6.34 to 5.29 and then declined to a great extent reaching the level of 1.44 in 2008. This trend is mostly attributed to the relevant movement of operating cash flows (denominator in the ratio). In particular, cash flows from operations declined from $6,737.52 million to $3,409.98 million in 2006, then they almost doubled in 2007 and fell sharply in 2009. The low price cash flow ratio reflects the very low stock price (numerator) as reflected due to the economic crisis.

The Price to Book Value decreased till 2005, then rose within the next two years and fell steeply to 0.27 in 2008. This ratio looks at the value the market places on the book value of the company. The greatest level of 1.25 in 2007 indicates that the market was willing to pay higher premium for the company. The least confidence is depicted in 2008.

6.4. Company's performance

12/31/08

12/31/07

12/31/06

12/31/05

12/31/04

Profitability

Return on Equity-total

2.82

12.66

14.38

19.42

24.81

Operating Profit Margin

0.94

3.71

2.56

3.20

5.88

Liquidity

Quick Ratio

0.48

0.55

0.58

0.58

0.81

Qurrent Ratio

0.63

0.72

0.72

0.73

1.03

Gearing

Gearing Ratio

26.22

25.09

26.21

30.74

103.63

EBIT/ Interest Expense

3.04

8.97

10.65

16.26

24.09

Activity

Total Assets Turnover

0.59

0.60

0.59

0.61

0.66

Sales to Working Capital

-2.81

-3.73

-3.71

-3.73

51.02

Valuation-Investment

Earnings per Share

3.09

14.87

14.54

15.43

18.15

Dividend Yield

0.00

0.04

-

0.03

-

l Profitability

The Return on Equity has substantially diminished over the last few years from 24.81% to just 2.82%. This gradual decline from 2004 to 2007 can be attributed to the increase of the shareholders equity along with the simultaneous decrease of the after taxes profit throughout these years, except for a small rise from 2006 to 2007 in the latter . A major decrease of the profits from 2007 to 2008 led primarily to the 2.82 ratio-a decrease of about 77%.

The Operating Profit Margin declined gradually from 5.88% (2004) to 2.56% (2006), due to a higher than expected increase in raw materials prices and a competitive European Market. In 2007 the ratio climbed to 3.71% because of further international sales growth and a better management of manufacturing and logistics costs. In 2008 the operating profit margin fell to 0.94. Such decline can be attributed to the fierce reduction in production, the rise in cost of raw materials and all the relevant consequences of the economic recession in that year.

l Liquidity

Both quick and current ratios are below one, throughout all the years from 2004 to 2008(except for the 1.03 of current ratio in 2004), indicating the increasing disability of Renault to convert assets into cash quickly. This trend underlies the risk of the company of not meeting its short-term obligations. In addition, the level of inventories rose substantially to $8672.56millions till 2007 and in 2008 fell to 7320.21 millions.

l Gearing

The Gearing Ratio follows a downward trend from 2004 to 2007, while it slightly increased in 2008, indicating that the first four years the company reduced the financial risk and depended on the financing from equity rather than outside factors. Although the debt increased from 2004 to 2007, the common equity increased too, financing the maturities. In 2008 the ratio rose to 26.22 partially because of the decline of common equity from 2007 to 2008. The so called Interest Coverage declined all over the years reaching 3.04 in 2008 because of the increasing interest expense that is attributed to significant debt issuances. The 2008 of 3.04 that is below 5 should bear concerns.

l Activity

The total Assets Turnover followed a downward route (2004-2008), except for a minor increase by 0.1% from 2006 to 2007. The declining route can be mostly attributed to increasing capital base from 2004 to 2007, indicating that the fixed assets of the company contributed to the revenue generation.

The Sales to Working Capital was negative from 2005 to 2008 due to negative Working Capital that means that there was not enough liquid reserve for the company to meet its obligations. The liquidity problem indicated above reflects this problem. However, in 2008 the ratio increased slightly because of the decline in the company's liabilities.

l Valuation-Investment

The Earnings per Share ratio declines throughout the last 5 years (except from 2006 to 2007) and in 2008 reaches a very low level of 3.09. The downward trend could partially be owing to the low levels of Income after Tax. In 2008 the Net income available to Common was $793.74million in comparison with $3,902.07million in 2007.

Concerning the Dividend Yield, regardless of two s omitted in 2004 and 2006, it seems that it increased from 2005 to 2007 to 4%, enhancing the opportunities for investors. In 2008 the ratio fell to 0% in 2008, showing that the income accrued from the company investments reduced to zero as an impact of the economic crisis.

6.5. Cash flow analysis

12/31/08

12/31/07

12/31/06

12/31/05

12/31/04

Net Cash Flow from Operating Activities

-337.79

6,937.17

3,409.98

5,998.16

6,737.52

Net Cash flow from Investing Activities

5,335.16

4,308.50

4,013.91

3,425.50

4,223.01

Net Cash Flow from Financing Activities

2,076.79

-4,299.73

342.84

-1,956.92

-1,170.27

Exchange Rate Effect

-105.65

-213.45

75.16

127.39

347.95

Net Increase/Decrease in Cash & Cash Equivalents

-3,701.81

-1,884.51

-185.93

743.13

1,692.20

l Throughout the years from 2004 to 2008, the highest amount of cash flows generated from operations was recorded in 2007 ($6,937.17 millions), indicating the good financial position of the company and the high sales attained via the business operations. However, in 2008 the economic cricis as well as the constant attempt to keep the volume of inventories in low levels, reduced the volume and production of the company, leading to negative cash flow from operations. The Board of Directors decided not to pay any dividends in 2008.

l After 2005, the cash resulting from gains from investments in the financial markets and operating subsdiaries, increased. That means that the joint ventures, acquisitions, the expenses for Research and Development and other Investing activities, proved to be prosperous. The Dividend Yield, especially between 2005 and 2007 fluctuated within high levels.

l The Cash Flow from Financing activities was negative in 2004, 2005 and 2007, while in 2006 was positive but low. The negative numbers indicate that the long-term debts of the company as well as the common equity increased that period. The positive in 2008 may reflect the fact that the company uses its own cash to pay its shareholders. In fact, despite the crisis, the RCI Banque (subsidiary of Renault group) managed to provide sales financing to the Renault Group.

l The negative Foreign Exchange in 2007 and 2008 can be related to the impact of yen appreciation on the hedge against the Group's share in Nissan and the depreciation of sterling. After 2006 there is negative net cash flow that means that the company does not have enough cash to support its operations. In fact, Renault appears to have a liquidity problem.

6.6. Stock market performance (millions USD)

12/31/08

12/31/07

12/31/06

12/31/05

12/31/04

Price(Close)

25.79

141.83

120.00

81.27

83.66

Price Change (Yr/Yr)

-116.04

21.83

38.72

-2.39

14.66

http://banker.thomsonib.com/ta/TARenderChart.aspx?DSN=Datastream&EntityKey=Q000004030&Key=RNO-FR&KeyType=1&Width=500&Height=315&ColorTheme=0Period=&Frequency=annual&PriceStyle=Price&IUC1=&IUC2=&IUC3=&OtherIUC=&ILC2=&ILC3=&ILC1=Volume&IndexStat=WMC&CompareSymbolValue=&CompareIndex=RELINDX&IUC1Value=N/A&IUC2Value=N/A&SPeriod=12/31/2004&EPeriod=12/31/2008&IUC3Value=N/A&ILC1Value=N/A&ILC2Value=N/A&ILC3Value=N/A&OtherIUCValue=N/A&Idx2Y=0&CustCmp2Y=0&SymCmp2Y=0&Unadjust=0&PadData=1&Rebase=1&Currency=USD&Product_Code=Banker&ChartType=Price

As seen from the table above the price of the company reduced slightly from 2004 to 2005 and then it increased substantially in 2006 and reached the level of 141.83 in 2007. In 2006 and 2007 the investors were more confident concerning the performance of the company and they were willing to pay a higher price for the company's stock. This is also justified by the increased level of dividend yields these years (4% and 5%), compared to the past, indicating that the shares were about to offer high returns. The economic crisis in 2008, affected the prices of most stocks, so a decline of 80% in the share price reflects overly the market turbulence that period.

7. Peer Analysis

7.1. Profitability Analysis

 

2008

2007

2006

2005

2004

Return on

Equity

Toyota Motor Company

-3.98

14.49

14.68

14

13.6

Ford Motor Company

0.25

1.92

1.95

2.95

3.32

Honda Motor Company

3.2

13.29

13.76

16.1

15.78

Volkswagen AG

14.21

14.02

10.89

4.84

2.8

Renault SA

2.82

12.66

14.38

19.42

24.81

Operating

Profit

Margin

Toyota Motor Company

-2.25

8.64

9.35

8.93

8.76

Ford Motor Company

2.43

2.94

3.12

5.02

6.54

Honda Motor Company

1.9

7.9

7.7

7.4

7.3

Volkswagen Group

3.19

4.25

1.97

0.66

0.29

Renault SA

0.94

3.71

2.56

3.2

5.88

When reading the profitability ratio of the whole sector, some trends and characteristics can be found among these five companies. Return on equity shows how well a company uses investment funds to generate earnings growth. During the year from 2004 to 2007, the ratio did not change too much for each individual company. While, from 2007 to 2008, ROE decreased in four of the five companies except Volkswagen AG. For Toyota Motor Company, the even went to negative which is due to the negative operating income and net income. Ford, Honda and Renault showed more than 50% decreases. Only Volkswagen witnessed a slightly increasing trend. One of the important reasons is the declined net profit during these years, partly because of the severe competition within the sector which leads to the price cut, partly because of the rise in cost of raw materials which has a heavy influence on the cost of the products.

Operating profit margin has a similar trend with the ROE. The s of the five companies declined from 2007 to 2008. For Renault SA, it declined almost 75%, as well as for the Toyota company. It is an obvious signal that the whole sector is influenced by the economic recession because each sale can produce less profit than that in the previous years. This is mainly because the declined demand around the world as well as the cost of the raw materials.

The economic situation of the whole world is recovering recently. However, it might take some time to return to the situation before the financial crisis. In the following years, the sales might begin to increase step by step for the whole sector. But when considering the individual one, it depends on the different strategies.

7.2. Asset Utilization Analysis

FY08

FY07

FY06

FY05

FY04

Asset Turnover

Toyota Motor Company

0.71

0.81

0.74

0.73

0.76

Ford Motor Company

0.63

0.60

0.59

0.59

0.58

Honda Motor Company

0.9

1.0

0.9

0.9

0.9

Volkswagen AG

0.7

0.8

0.8

0.7

0.7

Renault SA

0.59

0.60

0.59

0.61

0.66

Sales to Capital Employed

Toyota Motor Company

28.93

180.70

1412.62

29.78

15.30

Ford Motor Company

10.62

6.21

5.68

11.06

41.64

Honda Motor Company

21.62

21.53

26.57

-43.54

-54.62

Volkswagen Group

10.02

8.75

13.54

21.00

13.23

Renault SA

-2.81

-3.73

-3.71

-3.73

51.02

· The Asset Turnover Ratio followed a declining route from the fY04 till the fy06 across all the companies. In fy07 the ratio reached its highest point except for Ford's that continued its upward trend till 2008. Automobile industry appears to have relatively low asset turnover ratios compared to other sectors, indicating higher profit margins. The decreasing trend till 2006 can be explained by the increase in the capital base of the companies. In other words, the fixed assets contributed to the revenue generation at a greater extent across the years. The rise in 2007 does not necessarily mean lower utilization of assets, but can be explained by the acceleration of sales because that year was a prosperous one.

· The Sales to Capital Employed explains how effectively a company is using its working capital (current assets-current liabilities) to increase sales and finance its operations. For each company there is different trend across the years. The extremely high ratio for Toyota in FY06 may indicate either excessive sales volume in comparison with the investment in the business or that the company is based on the credit granted by other suppliers like banks in order to supplement the margin of operating funds. Renault had negative ratio from 2005 to 2008 due to negative Working Capital that means that there was not enough liquid reserve for the company to meet its obligations. Honda experienced the same situation the first two years but after 2006, followed a stable asset utilization policy.

7.3. Liquidity Analysis

2008

Toyota

Ford

Honda

Volkswagen

Renault SA

Quick Ratio

0.81

1.05

0.6

0.8

0.48

Current Ratio

1.07

1.21

1.1

1.2

0.63

The liquidity ratios could measure a company's ability to repay the short liability and the risk of financial distress. In the five companies we choose, the Renault SA has a bad sign of liquidity ratios. The current ratio for Renault is below 1, indicating the higher possibility to fail the debt repayment. However, this does not necessary mean it will go bankrupt. But an unhealthy and risky financial position is illustrated. In addition, Honda and Volkswagen have big gaps between quick ratio and current ratio. This means the two companies may have relatively higher proportion inventory in the current assets. In fact, due to the recession and the shrinking of the automobile market demand, the inventory could not be easily be transferred to current assets and cover the due liabilities. Therefore, the two companies may have risk if the market would not recover because the inventory also incurred costs. Take the context into consideration, although the ford has the highest liquidity ratios it is not in a favor position because it has a very large outstanding debt amount.

7.4. Gearing Analysis

2008

2007

2006

2005

2004

EBITDA / Interest Expense

Toyota Motor Company

20.94

86.19

77.33

153.70

146.20

Ford Motor Company

-0.50

0.62

-0.76

1.22

1.65

Honda Motor Company

8.2

54.9

62.4

70.7

58.3

Volkswagen AG

7.6

7.3

3.1

3.0

2.5

Renault SA

3.04

8.97

10.65

16.26

24.09

Long Term Debt % Common Equity

Toyota Motor Company

62.63

50.40

52.92

53.41

55.44

Ford Motor Company

-76.88

233.49

316.38

1,268.12

1,229.66

Honda Motor Company

48.2

40.4

42.5

45.5

47.4

Volkswagen Group

95.0

92.0

106.8

131.4

143.0

Renault SA

26.22

25.09

26.21

30.74

103.63

* From the interest coverage ratio, Toyota has the best in term of generating revenue to cover interest expense. Renault, Volkswagen and Honda show better ratios compared with Ford during the economic crisis and do not show any difficulty to meet the interest expenses. However, Ford seems to have the worst situation as the negative EBITDA and high interest expenses and may be not able to generate sufficient revenue to cover the interest expenses.

* All companies show that they rely heavily on debt rather than equity which can lead to bankruptcy if these companies cannot generate enough revenue to cover interest expenses and loan repayment schedule. In addition, Ford shows the worst situation among its peer, with negative equity and substantial outstanding long-term loan. This may cause doubt about the continuing operation in the future.

7.5. Dividend Analysis

2008

2007

2006

2005

2004

Dividend Yield

Toyota Motor Company

3.21

2.82

1.59

1.40

1.63

Ford Motor Company

0.00

0.00

0.00

-

-

Honda Motor Company

2.72

3.02

1.63

-

1.21

Volkswagen AG

0.77

1.15

1.45

-

-

Renault SA

0.00

3.92

-

3.48

-

* Companies' dividends are fluctuating; as we can see the companies' dividend policies are quite varying.

* Toyota is following an “investor friendly” policy, distributing dividends every year, even in 2008, in the middle of a severe financial distress. We can say that Honda is following a similar policy, although the declined in 2008. Volkswagen has a relative low dividend yield and even thought its continuously upward trend in earnings, exhibited an even lower in 2008.

* Renault, being struck as well by the adverse effects of the general economic crisis, chose not to distribute any dividends at all in 2008. Moreover, Ford didn't distribute any dividends during the last few years, choosing to reinvest its residual earnings in order to survive its financial difficulties.

* In general Toyota and Honda seem to have a relative higher dividend yield than their competitors, and trying to keep shareholders satisfied they seem to exhibit better investment opportunities.

8. Reference

Annual reports

Ford Motor Company Annual Report 2009

Honda Motor Company Annual Report 2009

Renault SA Annual Report 2008

Toyota Motors Company Annual Reports 2009 and 2008

Volkswagen AG Annual Report 2008

Databases

Datastream

Datamonitor https://www.datamonitor.com/

Company Profiles for Ford Motor Company 2009

Honda Motor Company 2009

Renault SA 2009

Toyota Motors Company 2009 and 2008

Volkswagen 2008

Thomson one Banker http://banker.thomsonib.com/

Worldscope

I/B/E/S

Websites

Toyota Motor Company http://www.toyota.co.jp/en/index.html

Honda Motor Co http://www.world.honda.com/

Management Philosophy- Porter's Five Forces - Automobile Industry http://dianasunblog.blogspot.com/2008/03/porters-five-forces-automobile-industry.html

Five Competitive Forces in China's Automobile Industry: Bus and Coach Sector, Kwan Yu Him

Honda Motor Co., Ltd. - Financial and Strategic Analysis Review, Global Market Direct

Honda Strategy http://www.classicmotorstt.net/tradition_strategy.shtml

Books

Palepu, K.G., P.M. Healy V. L. Bernard and E. Peek, Business analysis & valuation using financial statements, Thomson South-Western, 2007

Business analysis and valuation ( required text book) ch5