LI Shares Fall -11.8%. Is This a Bargain?

Standing out among the Street's worst performers today is Li Auto, a auto manufacturers company whose shares slumped -11.8% to a price of $16.7, 59.47% below its average analyst target price of $41.19.

The average analyst rating for the stock is buy. LI lagged the S&P 500 index by -11.0% so far today and by -21.4% over the last year, returning -39.4%.

Li Auto Inc., through its subsidiaries, designs, develops, manufactures, and sells new energy vehicles in the People's Republic of China. The company is a consumer cyclical company, whose sales and revenues correlate with periods of economic expansion and contraction. The reason behind this is that when the economy is growing, the average consumer has more money to spend on the discretionary (non necessary) products that cyclical consumer companies tend to offer. Consumer cyclical stocks may offer more growth potential than non-cyclical or defensive stocks, but at the expense of higher volatility.

Li Auto's trailing 12 month P/E ratio is 1669.5, based on its trailing Eps of $0.01. The company has a forward P/E ratio of 75.9 according to its forward Eps of $0.22 -- which is an estimate of what its earnings will look like in the next quarter. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the third quarter of 2022, the consumer cyclical sector has an average P/E ratio of 24.11, and the average for the S&P 500 is 15.97.

A significant limitation with the price to earnings analysis is that it doesn’t account for investors’ growth expectations in the company. For example, a company with a low P/E ratio may not actually be a good value if it has little growth potential. Conversely, companies with high P/E ratios may be fairly valued in terms of growth expectations.

When we divide Li Auto's P/E ratio by its projected 5 year earnings growth rate, we see that it has a Price to Earnings Growth (PEG) ratio of -85.94. This tells us that the company is largely undervalued in terms of growth expectations -- but remember, these growth expectations could turn out to be wrong!

To understand a company's long term business prospects, we must consider its gross profit margins, which is the ratio of its gross profits to its revenues. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost. After looking at its annual reports, we obtained the following information on LI's margins:

  • 2021 gross margins: 21.3 %
  • 2020 gross margins: 16.4 %
  • 2019 gross margins: -0.0 %
  • 2018 gross margins: None %
  • Average gross margin: 12.6 %

We can see from the above that Li Auto business is not strong and its stock is likely not suitable for conservative investors.

To deepen our understanding of the company's finances, we should study the effect of its depreciation and capital expenditures on the company's bottom line. We can see the effect of these additional factors in Li Auto's free cash flow, which was $4,895,812,000.00 as of its most recent annual report.

Free cash flow represents the amount of money available for reinvestment in the business or for payments to equity investors in the form of a dividend. In LI's case the cash flow outlook is weak. It's average cash flow over the last 4 years has been $574,070,000.00 and they've been growing at an average rate of 90.0%.

Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.

Li auto's P/B ratio of 0.4 indicates that the market value of the company is less than the value of its assets -- a potential indicator of an undervalued stock. The average P/B ratio of the Consumer Cyclical sector was 3.11 as of the third quarter of 2022.

Since it has an inflated P/E ratio, an exceptionally low P/B ratio, and an irregular stream of weak cash flows with an upwards trend, Li Auto is likely fairly valued at today's prices. The company has poor growth indicators because of a negative PEG ratio and weak gross margins that are increasing. We hope you enjoyed this overview of LI's fundamentals. Be sure to check the numbers for yourself, especially focusing on their trends over the last few years.

Thanks for reading! Don't forget to subscribe to our free newsletter!

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.