The Big Three are back, at least in the eyes of investors.
As the much-ballyhooed electric-vehicle revolution loses momentum, investors are reappraising the shares of legacy producers, with gasoline-powered cars and hybrids set to generate billions of dollars in cash for years to come and account for the vast majority of sales.
Shares of the legacy firms, shunned in recent years as the industry’s past, are rising as EV stocks have tumbled, and Wall Street is jumping on board. Last week, a spate of analysts named General Motors Co., Ford Motor Co. and Stellantis NV as the industry’s likely winners with demand for EVs faltering.
The logic is that the steady profits from selling vehicles packing an internal combustion engine will provide a cushion that pure-play EV companies like Tesla Inc., Rivian Automotive Inc. and Lucid Group Inc. lack.
“The old-school carmakers offer a significant valuation discount to EV stocks, so for investors looking at the EV winter it is a way to gain access to autos with a greater margin of safety,” said Dave Mazza, chief strategy officer at Roundhill Investments. “While the world may be all EV sooner than later, sooner isn’t tomorrow and traditional autos may be cyclical but still around.”
US-listed shares of Stellantis — which encompasses Chrysler, Fiat and Jeep among its many brands — have jumped 22% this year through last week, beating the 7.3% advance in the S&P 500 Index. GM has risen 13%, while Ford is largely flat. Meanwhile, Tesla shares have plunged 34%, and the money-losing Rivian and Lucid have slumped even more.
At $521 billion as of Friday’s close, Tesla’s market capitalization is less than half its 2021 peak. But it still dwarfs the roughly $185 billion combined value of GM, Ford and Stellantis.
EV Shock
The cooling in the breakneck pace of EV sales since mid-2023 caught both carmakers and investors off guard. With EV companies trying to propel sales by lowering prices, their profit margins are eroding as well. Tesla has warned of a “notably lower” rate of expansion, and Wall Street expects its annual profit to drop for a second straight year.
Wells Fargo analyst Colin Langan last week said Tesla’s cash flow would turn negative if it slashes prices an additional 11%, after repeatedly lowering them across its global lineup since late 2022. The price of Tesla’s top-selling car — the Model Y — has dropped 25% since the beginning of 2023, according to Bloomberg Intelligence.
The company last week said it will raise prices on the Model Y in April, a move that some investors hope will mark an end to the relentless cuts, even as others saw it as a way to boost sales in March. Tesla gained in early trading on Monday.
Meanwhile, Wall Street’s cash-flow projections for the legacy companies are rising, along with those for profit and revenue.
“While EVs are the future, it’s the internal combustion engine product that generates the profits and funds the dividends and buybacks, while relatively insulated from Tesla and Chinese EV disruption,” Morgan Stanley analyst Adam Jonas said in a note last week.
Top Choice
Jonas picked Ford as his top choice among US auto stocks, saying that after years of spending heavily on EVs and self-driving cars, these companies are now focusing on giving cash back to shareholders.
“In a world of scarce capital and changing strategic priorities, we believe capital efficiency and cash return will be deterministic in driving share price performance for 2024,” he wrote.
GM, Ford and Stellantis spent a combined $22.7 billion repurchasing shares and paying dividends last year. Tesla doesn’t pay a dividend and the chatter around a possible buyback that emerged back in 2022 has faded.
Then there’s the yawning gap in valuations.
Tesla trades at about 50 times forward earnings, a ratio that’s steeper than even other mega-cap stocks. For GM, Ford and Stellantis, that number is in the mid-single digits.
Tesla may still expand at a faster rate than the legacy auto companies in the coming years. It also has another factor in its favor — the Biden administration is set to crack down on auto emissions to drive adoption of EVs.
But while Tesla’s shares leave no room for error, those of the older firms reflect very little reward for any success.
“On a relative valuation basis, traditional automakers remain attractive to EVs,” Roundhill’s Mazza said. “For years, investors bid up the price of EV companies because they had much higher growth. While the growth is still there, it is slowing and that’s never good for any stock that’s been valued on expectations materializing.”
This article was provided by Bloomberg News.