The global economy is decelerating and potentially headed into recession. Normally, this is unwelcome news for cyclical companies such as automobile manufacturers, but Hyundai Motor Co. shares are bargain priced due to a recent sell-off. Moreover, say analysts, the company has a track record of growing market share, sales and earnings through economic slumps. And it is in a stronger position this time around.
The shares trade principally in Seoul, South Korea, and were priced on Oct. 6 at 195,000 won, about 20 per cent below the May high. The shares are tracked by several depository receipts in the United States. They trade by appointment, as the saying goes. The one with the best trading volume is under the symbol HYMTF.PK. As of Oct. 6, the last trade had occurred at $26.25 (U.S.).
Royal Bank of Scotland analyst Simon Park, well-rated in StarMine Inc. rankings, recently upgraded his recommendation from “hold” to “buy,” setting a target price of 247,000 won. “We upgrade to ‘buy’ because we believe the recent share price decline offers a rare bargain-hunting opportunity,” he noted.
In fact, valuation is close to historical lows. According to Sung Moon Suh, an analyst at Korea Investment & Securities, the shares are selling at 7.5-times projected earnings per share (12-months basis), far below projected 13-per-cent growth in earnings per share. Thus, the price/earnings-to-growth (PEG) ratio is indicating substantial undervaluation since it is far below one, the fair-value mark according to a rule of thumb. Mr. Suh, also well ranked by StarMine, has a “buy” recommendation with a target of 320,000 won.
Hyundai Motor has a “proven track record of outperformance during economic downturns,” observes Mr. Park. While most peers saw volume declines during the economic downturn and financial crisis spanning 2008 and 2009, the auto company “enjoyed global [quarter-over-quarter]sales volume growth of 6.8 to 12.0 per cent….” Market share also increased, jumping from 2.7 per cent to 4.6 per cent in the U.S. between 2008 and 2010.
A macroeconomic environment of anemic growth and high fuel prices tends to favour the company’s fuel-efficient, “value-for-buck” product portfolio concentrated in the mid-size and smaller market segment, argue analysts. It wasn’t always so: Hyundai cars were once the butt of jokes on late-night talk shows. But quality has been enhanced over the years and now is commensurate with Japanese cars, while charging lower prices.
This growing “value car” image could be an advantage that makes Hyundai Motor a stronger operation than what its tangible assets convey. As Mr. Suh remarks: “Amid growing uncertainty in the global economy and continued high oil prices, Korean vehicles should remain in the spotlight thanks to their attractive value for the money.” Of course, improving brand image and quality will also be an asset during prosperous times.
“Compared to three years ago, Hyundai’s … lineup [is]much more competitive. As such, we believe Hyundai’s … market share will continue to grow at an accelerating rate going forward,” predicts Mr. Suh.
In 2010, the company was the biggest gainer in J.D. Power’s 2011 Automotive Performance, Execution and Layout (APEAL) study. In 2011, its new models overtook Japan’s top three car manufacturers, winning better scores in design, quality, performance and features.
Also noteworthy, Hyundai Motor outpaced Honda Motor Co. for the first time in J.D. Power’s 2011 vehicle dependability study. Plus, in the 2010 customer retention study, Hyundai rose from 47 per cent to 60 per cent, leaping from 11th to third place.
Hyundai Motor is also introducing higher-end cars. Its premium luxury sedan, the Equus, boasts a 385-horsepower V8 engine and refined 6-speed transmission that enable “superior levels of performance and fuel economy without paying the lofty premiums of other automotive companies,” claims the company’s website. The model had the highest score (904) of any vehicle in J.D. Power’s 2011 APEAL Study.
Besides better vehicle quality, Hyundai Motor is equipped in other ways to navigate macroeconomic headwinds (and tailwinds). One is an improvement in operating margins due to ongoing platform integration, “which has accelerated to optimize sales,” says Michael Sohn at Macquarie Securities Korea Ltd.
Platform integration involves consolidating production of car models over a fewer number of chassis, resulting in lower costs. According to data from Mr. Sohn, platform-integrated production will climb from 32 per cent in 2010 to 65 per cent by 2011, and to 84 per cent by 2012. Mr. Sohn, another favourite at StarMine, has a target price of 330,000 won and a “top pick” rating.
Other factors in Hyundai Motor’s favour include:
• Higher exposure to emerging markets thanks to “phenomenal growth in emerging markets such as China” (resulting in exposure to the U.S. and E.U. dropping to 25 per cent in 2010 from 30 per cent in 2007)
• Sales incentives are the lowest among competitors, giving it greater flexibility in the event more aggressive price competition breaks out
• The Yen’s safe-haven status has caused it to appreciate in recent years (and in recent months) more than the won, making Korean cars more price competitive to Japanese cars
• The historical low in the company’s global inventories (two-months supply), along with the launch of new, upscale models, should help keep production running at full capacity during all but the most severe of macroeconomic contractions
One of the more cautious of the top analysts in the StarMine rankings, Geoff Boyd at CLSA Ltd., cut his target price in mid-September to 250,000 won from 310,000 won. His rationale was that he felt compelled to revise earnings per share downward in order to factor in the risk posed by the rather uncertain macroeconomic environment. Nevertheless, he maintained his “buy” advice.
Note that HYMTF.PK is influenced by currency movements. If the won falls against the U.S. dollar, the published quote on U.S. markets will show a worse performance than the share price in Korea. However, for Canadian investors, what ultimately matters is the exchange rate between the won and loonie, so if the latter also falls against the U.S. dollar, it will offset the drag of a lower won-U.S. exchange rate on HYMTF.PK.
If you want to trade depository receipts with higher volumes, European markets tend to be better. These trades can be arranged electronically through the Global Trading Platform offered by TD Waterhouse’s WebBroker, for example.Report Typo/Error
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