Manufacturing Profit: What Is Driving Stock Prices in the Auto Industry?

In 2019, an investment analyst for a hedge fund firm based in the Bahamas was tasked with evaluating his firm’s exposure to the automotive industry. The hedge fund firm held various large positions in the automotive segment, most notably in two equities—Fiat Chrysler Automobiles N.V. and Ford Motor Company. The analyst decided to focus on these global industry giants as a proxy for the broader automotive segment. His manager expected an assessment of the industry’s prospects, so the analyst had to decide if the past stock performance of the two companies was a fair indicator of each company’s and the industry’s future. He also had to consider why one company would lose almost twice as much value as the other in one specific period. And why did the stock of the more diversified company experience the steeper decline? The analyst was eager to answer these and other questions, both for his own and his manager’s interest.

This case is designed to bridge the accounting–finance gap for upper-level undergraduate or early program graduate students by linking accounting concepts to financial valuation. There are no specific technical requirements in preparation for the case discussion. However, students should understand core accounting and finance concepts such as profit and price-to-earnings ratios. After working through the case and assignment questions, students will be able to do the following:<ul><li>Discuss conceptually the task of valuation.</li><li>Understand and apply a simple profit-based approach to valuation.</li><li>Discuss differences between economic profit and accounting profit.</li><li>Discuss and evaluate desirable properties of accounting reports based on different uses (e.g., forward-looking valuation versus backward-looking accountability).</li><li>Become aware of areas where managers have discretion over accounting, as well as why and how they may exercise the discretion.</li><li>Estimate the valuation consequences of significant organizational events through a profit lens.</li></ul>

• profit
• valuation