 Good day fellow investors! I recently got this question on my stock market research platform. Hi Sven! Any thoughts on Tata Motors? Price has dropped about 70% in two years and the price is down 62% year to date so from the peak a little bit higher but even more in the last two years so a really really terrible performance and I want to analyze Tata Motors and explain the cyclicality of the stock market. I kept saying in my comments every time somebody is asking me about car stocks I say those are cyclicals you have to be careful when investing in cyclicals things change very quickly and therefore Tata is an excellent example of this cyclicality that might that will affect also other car makers because first you have a company with a low price earnings ratio and everybody is looking oh this is a price earnings ratio of 7.9 but then comes the negative quarter that turns earnings into negative earnings negative cash flows and then you don't know how to value it anymore and then those who have been buying at low PE ratio are now selling because it's not the high dividend payer anymore it's not the low PE ratio and the future is uncertain so let's see how to incorporate that into an investing environment into an investing perspective and I'm sure you will learn a lot from this let's start I'll first give you company overview what's going on and then explain my views on it so Tata Motors they acquired Jaguar Land Rover in 2008 paid 2.3 billion from Ford and that's now also troubling the company so their bond risk quadrupled this year as the automaker plays catch up on electric vehicles and is hit by weakened demand in China so as your interest on the debt as the risk changes everything changes also in the fundamentals and if we look here in the fundamentals we have revenue has been going up in Indian rupees okay but the second line the net income is crucial it was very strong in 2015 then half 50% 2018 and now in fiscal year 2019 it is negative so from a company with a low price earnings ratio you go to a company with a negative price earnings ratio and on top of the negative performance they are increasing their capex spending so they are investing in new factories in everything to grow somewhere in the future and that is exactly what is backfiring for the company free cash flow per share is very very negative what does this tell me this tells me they are making huge investments in the late part of the economic cycle my neighbors will not have the money to buy new Range Rovers and if you come from the Huy area in the Netherlands the Bladikum you will know what I mean so especially with interest rates going up I don't see why are they going pedal to the metal with investments are they not seeing that there is cycle at the end but that that is how managers are they always have to grow because you are either grow on Wall Street or you're dead sometimes growth is also a way to get killed but that's something nobody thinks about if I look at the balance sheet we see that there is also very high leverage total liabilities are 3.2 trillion rupees okay doesn't matter the currency doesn't matter here total liabilities are 2.3 billion so the equity is just 900 billion rupees that means that the equity is 27 percent of assets that is a very very low equity which means that there is high leverage and that is usually a problem if you look at the current assets you see also they they are increasing and especially inventories have increased over the last three four years if inventories are increasing it means that you are not so efficient and you are not selling which means there is a slowdown in your selling channel and you are not doing something right what are they not doing right well they are investing in other products and developments but the sales haven't been there China has especially backfired as the sales are down 43% diesel issues in Europe high incentives market cyclicality in the united states brexit also affecting diesel uncertainty so performance they say is impacted by challenging conditions and macro headwinds well there are always challenging conditions in a highly competitive industry like the automotive industry so that's something to always keep in mind if we look at their sectors specifically for jaguar land rover europe is down 11 percent china is down 44 percent even if their industry is down just 7 percent in total so the year on year units are down 14 percent which leads from good profitability to a significant loss and this is what i keep saying when it comes to automotive companies just a small change in the economic environment that we haven't yet even seen so jaguar is a perfect example of the economy still being strong but they losing 30 percent of revenues wow so what happens when we actually see a recession in europe in the united states and a slowdown in china then you see oh my god what will happen to this car manufacturer and also other car manufacturers because they are all in the same basket they went from 382 million pounds of profitability to 90 million pounds in losses and that's something that then analysts they don't know what and when will things change especially as they are investing one billion during the quarter and they expect to invest another four billion pounds in the next quarters so that's very very risky and then i see this turn around and transformation plan launched if you look at buffett's annual report at the beginning he says we don't invest in turnarounds because that is too risky they don't want to invest in green bananas they want to invest in great companies and when you see a turnaround then it's all about trusting the management that is already not delivering they want to save on cost but still invest a lot of money they want to improve their cars and hope to revival the sales in china will they do that i don't know so tata motors they are already also the indian comp part is in turnaround point two so the question here is do you have visibility into what will jaguar land rover and tata look like in a year two years three years four years if you have visibility into that in the highly competitive automotive environment then be my guest and invest when you think that the stock is underpriced i don't have visibility into that i know it's a cyclical i know it's highly leveraged i know even now when the economy is strong when interest rates are still low it's already in trouble so i might only imagine what might happen next and that's why i have been advising against investing in car companies in general in the late part of the economic cycle there might be more pain there might be upside if the management delivers and they turn it into profitability again then people will say okay they are delivering they will grow and the stock price might shoot up if they don't deliver the stock price might go down down and down and that is the risk reward do i have the visibility no therefore i simply stay away from that and put it in the too hard to assess basket and i think 99 percent of retail investors should put it also in that basket because that's not investing it is betting and that is what jaguar land rover is doing when they are investing four billion pounds into new companies new factories in the late part of the economic cycle because everybody else is doing that too so everybody is investing huge supply of cars huge supply of new models high competition low margins high capex requirements that's a great industry to invest thank you but no thank you also the debt profile huge debt five billion in debt on the revenue okay that's not even that much but we have seen how that looks on the balance sheet now here is the valuation if we see 2018 it was nine price earnings ratio of nine this is end of fiscal year 2018 and then it turned into a negative earnings yield now so you don't have a p ratio to hang on 43 billion dollars on revenue a good car maker can make five percent net profits which is two billion when things are good add a valuation of seven that's usually for such cars and you get to 14 billion the market cap is seven billion so if they turn around there might be upside of 100 percent however if we look at the what the management is saying they will make profit on non-recurring items charge initiatives new and refreshed products and market seasonality if they deliver okay they might improve the profitability if not oh my god they will have another year of losses and if the economy turns really against them with really bad macroeconomic factors like recession somewhere then they're really really in trouble because you have to put those external factors and cyclicality into business models so this company there is permanent capital risk just think of opel and other car makers that simply disappear because they are investing in the wrong time in the cycle they are not looked from the markets 44 percent downturn demand for your cars in one quarter that's huge that's something you should see coming ahead or make a warning or something that's incredible and then if those investments if there is not a strong growing economy to cover for those investment in if Europe goes into recession 2020 and there is the new factory in Slovakia that they just built there is no profitability there is huge capex on something else etc etc so that is the risk reward I have no visibility if you have the visibility please tell me about it in the comment below I think there will be a great discussion but that is why I put these kind of companies until I have the visibility and until I have a low debt car manufacturer with high upside at the end of the bottom of the cycle until then thank you car stocks I'll see you at the bottom of the cycle and then I'll pick every each one of you at the bargain and I'll pick that one that has the most upside with the limited downside risk so thank you but again not now even if you are already down and even if you might spike 100% you are not for me so I hope I explained my view on this and perhaps enlightened some of you that are looking at this company seeing it down and thinking it's a bargain if you want to check what I do please check my stock market research platform before 2019 because then the stock price the price of the research platform will go up thank you and I'll see you in the next video