Today, I want to talk about cars—and car stocks. To get into them, let’s start with a little car nostalgia.
Why the Fiat Chrysler-Peugeot Merger Won’t Work
When my best friend from high school wanted to buy a cool, affordable Italian car, he chose a yellow Fiat 128—previously named European Car of the Year in 1970. It was so small that we had fun jumping over it—until we noticed that we were actually leaving dents.
When my father achieved financial success, he bought a Chrysler 300. With big bench seats, it fit all five of us kids easily. It was beige, and drove like a boat.
And when my sister-in law wanted a cool, used foreign car, she bought a Peugeot 504. It was brown.
Once upon a time, these were all cool brands—Fiat, Chrysler, Peugeot.
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Today, not so much, as was illustrated quite clearly by the news this week that Peugeot was merging with Fiat Chrysler (FCAU) in a $49 billion deal.
Fiat Chrysler, of course, is an entity that is only five years old itself, born from the U.S. government’s rescue of Chrysler from bankruptcy in 2009.
As for the new Fiat Chrysler-Peugeot merger, pegged at $49 billion, it comes as no surprise. These legacy automakers have been hit by both a global slowdown in auto sales and a growing need to invest in clean technology (hybrid and electric) to meet new emissions targets in Europe and China. In fact, Peugeot recently bought emissions credits from Tesla (TSLA) to comply with EU emissions standards.
Fiat Chrysler, meanwhile, saw sales drop by a third in the first half of 2019, while Peugeot saw sales drop more than 50%. Both are clearly well behind the curve in the race to shift from the internal combustion engine to cleaner alternatives, but they’re not alone. Most established manufacturers now have excess capacity of old technology and insufficient capacity of new technology.
The Other Global Manufacturers
Fiat Chrysler and Peugeot aren’t the only automakers looking to escape the trap of slowing sales combined with the need for new investment. So let’s run through each publicly traded automaker, from biggest to smallest, to see where the weak spots are, and then to see if there are any investment opportunities in car stocks.
Sizing Up 14 Car Stocks
Toyota (TM), with a market capitalization of $195 billion, is still growing revenues, though at single-digit rates over the past three years. But earnings trends have not been good, and analysts see flat trends ahead—though they’ve recently reduced their estimates.
Daimler (DDAIF) is second, but far behind Toyota, with a market cap of $62 billion. Its revenue trends have been similar to Toyota’s, but its earnings trends have been worse, falling over the past six quarters. The stock is down from 100 to 60 over the past five years and analysts recently reduced their earnings estimates.
Tesla (TSLA) has a market capitalization of $56 billion, more than double its annual revenues, but that’s because the company is growing. Second-quarter results, released two weeks ago, included a surprise profit of $1.86 per share on revenues of $6.3 billion—while analysts were expecting a loss of $0.42 per share. The biggest reason for the profit was reduced costs, particularly for the Model 3, which accounted for 81% of the quarter’s deliveries. (The stock was up 17% on the news.)
Tesla has no legacy internal combustions operations; all its work is devoted to battery electric vehicles—with sidelines in the complimentary businesses of solar power installations and large-scale backup batteries. And it’s doing well in China, too; Tesla sold 21,830 cars in China in the first half of the year, which was up 174% from last year. Next year it will have its China Gigafactory running, allowing it to manufacture cars even more cheaply.
Volkswagen (VWAGY) is an interesting case. Volkswagens were what I drove when I was young. But nowadays, when I see Volkswagen, I think about Dieselgate, and corporate cheating on emissions standards. The company has been struggling to grow this year, though its stock looks better than DDAIF.
General Motors (GM) has a market capitalization of $53 billion, but revenues shrank in three of the past four years, and continue to do so today. Admittedly, GM pays a 4% dividend, but if analysts continue to reduce their earnings estimates, that may shrink, too!
Honda Motor (HMC) has a market capitalization of $47 billion, but has seen revenues shrink in two of the last three quarters and analysts have lowered their estimates. The stock is down from 37 just 18 months ago.
Bayerische Motoren Werke (BMWYY), better known to Americans as BMW, has a market capitalization of $46 billion—and it’s shrinking. Revenues have barely managed growth in recent years, while earnings have been shrinking, and the stock looks terrible—down to 25 from a high of 39 just 20 months ago.
Ford Motor (F) yields 7.0%, and that’s the best thing I can say about this stock. Revenue growth hasn’t topped 3% since 2015—and has fallen in two of the last three quarters. Earnings are shrinking, and analysts’ estimates keep falling, just like the stock.
Ferrari (RACE) is a bright spot in the internal combustion vehicle industry, thriving in a world where emissions controls don’t matter; you just pay the price. Growth rates are modest, but earnings trends are impressive in this group, with analysts looking for earnings growth in both 2019 and 2020. The stock hit 170 in July before correcting normally and it’s headed back up now. It’s worth a look.
Nissan Motor (NSANY) has a market capitalization of $26 billion, but three of the past four quarters have brought declining revenues and earnings have been falling for six consecutive quarters. As for the stock, it was at 22 early last year but recently hit 12.
Subaru (FUJHY) was formerly known as Fuji Heavy Industries (thus the symbol) and still gets 9% of its revenues from non-automotive activities, primarily aerospace and industrial. And I do see a glimmer of light here. The stock has trended up from 10 to 14 over the past 10 months and analysts have recently raised their earnings estimates. With a market capitalization of $22 billion, it’s worth a look.
Tata Motors (TTM), based in India, is the parent company of Jaguar Land Rover, which accounts for 75% of revenues, as well as Daewoo and Hispano, and the stock has been a disaster in recent years, falling from 50 to 7 at its August low. Blame five consecutive quarters of declining revenues and losses in five of the past six quarters. But the stock, with a market capitalization of $7 billion, may have bottomed! Analysts’ estimates have recently been raised and the stock has jumped from 7 to 12. Take a look.
BYD Co. (BYDDF) is the first of two Chinese companies in the group, and with a market capitalization of just $4 billion, it’s far from a global player. Interestingly, automobiles account for only 55% of revenues; the rest comes from mobile handset components, rechargeable batteries and photovoltaics. Revenues grew 18% in 2018 to record highs, but earnings trends haven’t been as good, and the stock has lost half its value over the past two years.
Nio Inc. (NIO) is the other Chinese company, with a market capitalization of just $1 billion—and shrinking. Nio makes electric cars, but delivered only 4,799 vehicles in the second quarter as a cash crunch at the company deepened. Last week the CFO resigned. Not a good sign.
Conclusions on Car Stocks
For growth-oriented investors like me, there’s almost nothing of interest here; Tesla and Ferrari are the only real car stocks worth considering. In fact, Ferrari’s success suggests that other manufacturers might benefit from spinning off their performance divisions and directing them to make high-performance vehicles where price is no object. But Tesla’s success—combined with the heavy push into non-polluting vehicles in China and the increasingly tough emissions standards in Europe—tells us the future is in battery electric vehicles.
For value-oriented investors, there’s certainly a lot of “cheap” merchandise in this group of car stocks, but my sense is that we need to see more bankruptcies and mergers to wash out the old assets and allow investment in new. And it won’t be pretty.
Timothy Lutts heads one of America’s most respected independent investment advisory services. Each week, Tim personally picks the single best stock in his exclusive Cabot Stock of the Week advisory. Build your wealth and reduce your risk with the top stock each week for current market conditionsLearn More