Tesla’s (NASDAQ:TSLA) incredible rise toward the $1 trillion market capitalization set a wide halo in the stock market. It may have partly added to the froth in electric vehicle (EV), battery and clean energy stocks. Add in the Democrats winning the presidential election and the historic Georgia Senate runoff, and it’s no wonder we’re seeing the sector lifted. The result is that investors are frantically chasing Tesla and related EV names. But what about other automobile stocks?
This created a wide disparity between the valuation between Tesla and automobile stocks. At what point will internal-combustion-engine stocks attract investors? As long as the stock market believes that fully electric cars will replace gas-powered ones, the valuation gap will widen. Value investors have nine stocks — that are not named Tesla — to consider.
- General Motors (NYSE:GM)
- Li Auto (NASDAQ:LI)
- Magna International (NYSE:MGA)
- Fisker (NYSE:FSR)
- CarMax (NYSE:KMX)
- Fiat Chrysler (NYSE:FCAU)
- Toyota Motor (NYSE:TM)
- Ferrari (NYSE:RACE)
- Workhorse (NASDAQ:WKHS)
- QuantumScrape (NYSE:QS)
Automobile Stocks: General Motors (GM)
An embarrassing deal with Nikola (NASDAQ:NKLA) should have hurt GM stock. After accusations of fraud, General Motors found a way to cut the scope of its deal — the company debuted a new marketing campaign to promote its EV strategy.
As shown below, GM beat consensus estimates in the last three quarters:
|Surprise Type||Announce Date||Period End Date||Actual||Est.||Surprise (%)|
On the surface, GM is only debuting a new marketing campaign. But the brand-identity transformation will mark an inflection point.
Data from simplywall.st
Investors are valuing the company at a forward price-to-earnings (P/E) ratio in the high single digits. Tesla gets to trade at a four-digit P/E multiple. As long as GM’s $27 billion investment in EV and autonomous vehicles bears fruit, investors will accumulate its stock.
Li Auto (LI)
Chinese auto firm Li Auto has posted impressive monthly delivery figures. In December 2020, the company delivered 6,126 Li ONEs. This is up by more than fivefold from last year. Though the unit count is nowhere close to that of Tesla’s production level, the growth rate is better. If Li Auto keeps up this pace, the stock could command valuation multiples that are higher than its peers.
Last month’s order count is the highest level ever reported from the firm. Investors may want to wait for LI stock to pull back first. Even if revenue tops CNY 33.51 billion by Dec. 30, 2022, shares trade at a premium, according to the simplywall.st financial models.
Conversely, the average Wall Street price target is around $44.
Magna International (MGA)
Growing investor interest in auto-parts suppliers has led to an uptrend in Magna shares. And buying momentum accelerated after a definitive deal with Fisker.
The firms achieved a Preliminary Products Specification (PPS) engineering gateway in November 2020. From there, Fisker and Magna may reach the objective of delivering the all-electric Fisker Ocean SUV in Q4 of 2022. Readers may agree that this prototype is attractive. More importantly, a $40,000 price target is very low. Its release will likely pressure sales of Tesla’s Model Y and Model X. Magna and Fisker may have to sell at a price even lower than that. Tesla already lowered the price of the Model Y by $8,000 on Jan. 8.
The metrics suggest that MGA stock is worth nearly $100 a share. You can change around the numbers using that link.
In 2019, Magna won its biggest contract for transmission technologies. The multi-year contract includes supplying dual-clutch transmissions for hybrid and front-wheel vehicles. So, Magna does not rely solely on the EV market. If sales of ICEs accelerate, Magna’s revenue grows.
Bearish short interest of 15% on Fisker could lead to a short-squeeze in the coming weeks. The bears are underestimating the value of FSR’s agreement with Magna.
Magna has the expertise to meet Fisker’s delivery timeline of an all-electric SUV in Q4 2022. MGA will exclusively manufacture the Fisker Ocean in Europe. It already supplies many high-quality vehicles for luxury brands like BMW. By partnering with a supplier known to produce quality, Fisker has a good chance of growing SUV EV sales next year.
Used-car sales firm CarMax briefly fell after posting third-quarter results. The firm earned $1.42 a share, and revenue rose by 8.1% year-over-year (YoY) to $5.18 billion.
Between 2015 and 2019, revenue and income trended higher. The P/E ratio also spiked up, though market valuations rose in that time, too.
The total wholesale unit increase of 10.8% YoY supports CarMax’s earnings potential. Although its profit per unit fell slightly to $906, this outpaced the depreciation in the broader market. The company managed its CarMax Auto Finance well. Income increased by 54.7% YoY, lifted by a higher net interest margin and a rise in average managed receivables.
Consumers who know how to save money by buying used cars will shop at CarMax. Getting the latest EV is too expensive at this time. This trend will lift KMX stock this year.
Toyota Motor (TM)
President of Toyota Akio Toyoda has criticized the EV hype — and he’s not completely wrong. The executive said that Japan would have no electricity left if all cars run on electric power. The country would need between $135 billion to $358 billion to support 100% EVs.
Toyota need not complain about the EV valuations compared to its share price. TM stock is on an uptrend and trading near its 52-week high. Still, the stock is valued at around 15 times P/E. It has a market capitalization of around one-third of Tesla’s stock. While the smaller size is demoralizing, Toyota’s quality and years of experience in hybrid vehicles will drive its profits higher this year.
|Price / Earnings||14.3||100+|
|Price / Sales||0.9||1.1|
As shown above, TM stock scores an 84/100 on value. This is above the industry average.
Ferrari’s expensive supercars are in high demand, despite the weak economic backdrop. In the third quarter, the company posted revenue falling by 3% to EUR 888 million. Revenue from cars and spare parts rose by 2.6%.
With a record order book and very few cancellations, the supplier of the beautifully designed Ferrari Monza SP1 and SP2 will add the Portofino M to its lineup. Investors should expect earnings to climb again in the quarter. Unlike Tesla, whose earnings are minuscule, Ferrari’s EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) growth and free-cash-flow growth rebound will give RACE stock a lift.
|Discount Rate||9.0% – 8.0%||8.50%|
|Terminal EBITDA Multiple||20.7x – 22.7x||21.7x|
|Fair Value||$205.68 – $233.98||$219.60|
In a five-year discounted cash flow EBITDA exit model, RACE stock is worth about $220. Readers may change the input parameters to come up with revised fair value.
For months, investors waited for Workhorse to announce a bigger contract deal. So, the purchase order for 6,320 C-Series all-electric delivery vehicles is a welcome milestone.
Workhorse will supply the EVs to Pride Group Enterprise. This is a privately held company in the transportation equipment retail, wholesale, leasing and rental market. The company did not share the value of the deal.
CEO Duane Hughes said, “Our new agreement with Pride marks our largest individual order to-date and expands our sales channel internationally into Canada for the first time.”
Expect the addressable market growth to lift Workhorse’s revenue this year.
In the third quarter, Workhorse set a 2021 production volume target of 1,800 vehicles. At the same time, it announced a purchase order for 500 C-1000 trucks. It also unveiled a partnership with Hitachi and Hitachi Capital America to optimize supply-chain-related capabilities. The national dealer network will support Workhorse’s eventual sales growth.
The Special Purpose Acquisition Company (SPAC) structure sped up companies going public, leading to a bubble in many listings. QuantumScape might buck that trend. The company develops solid-state batteries for the EV market.
Performance data on its battery technology fueled a frenzy of buying in QS stock. The company posted that “QuantumScape’s newly-released results, based on testing of single layer battery cells, show its solid-state separators are capable of working at very high rates of power, enabling a 15-minute charge to 80% capacity, faster than either conventional battery or alternative solid-state approaches are capable of delivering.”
Investors seeking EV suppliers should look at QS after the stock price settles down. Developing quick-charging for EVs would accelerate its adoption over ICEs. Furthermore, the company wrote that “the data shows QuantumScape battery technology is capable of lasting hundreds of thousands of miles, and is designed to operate at a wide range of temperatures, including results that show operation at -30 degrees Celsius.”
The poor performance of EVs in extremely cold environments did not deter sales. But extending the range and the operating temperature is a welcome development.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.