Wall Street wrestles with how to value 100-year-old GM, Ford as automaking goes all-in on EVs

Ford unveiled its new all-electric Transit van on Nov. 12, 2020.


With President Biden devoted to pushing electrical autos as a part of each his local weather and commerce insurance policies, coupled with scorching monetary markets prepared to finance almost something inexperienced, strain is constructing on automakers to transcend nibbling on the edges of their technique and remake themselves completely to chase the electric-car revolution.

The stakes are heating up within the auto business as know-how titans such as Apple edge nearer to finalizing a deal with Hyundai-Kia to manufacture an Apple-branded autonomous electrical automobile on the Kia meeting plant in West Point, Georgia.

Influential Morgan Stanley auto analyst Adam Jonas is main the dialogue about whether or not automakers like General Motors and Ford could be higher off splitting in two, or making different strikes designed to isolate the value of their electrical automobile franchises from the inner combustion engine (ICE) vehicles and vans that GM, not less than, says it can wholly change with EVs by 2035. Toward that aim it has plans for 30 new EVs globally below a $27 billion funding in electrical and autonomous autos by 2025. Germany’s Daimler pushed the argument ahead by asserting Wednesday that it could break up its automotive and truck making items, with the truck firm’s money move devoted to financing its push into electrical autos.

Ford introduced with its earnings on Thursday afternoon that it will make investments $29 billion in EVs and autonomous autos by 2025, $22 billion in EVs particularly, which represented a doubling of its beforehand acknowledged $11 billion spending dedication. That continues to be wanting GM’s all-EV 2035 timeline — its earnings are set to be reported subsequent week.

Jonas is arguing that the market could also be undervaluing the businesses’ electrical automobile companies, although he’s solely bullish on GM among the many two. He says buyers can also be overvaluing the businesses’ legacy companies, which in every case is carrying a number of debt and has tens of billions of {dollars} tied up in factories and gear that may have to be both retooled or mothballed over the subsequent decade or extra. He says buyers want to look past quarterly earnings to seize a very powerful catalysts for these firms sooner or later.

“We believe management actions to address issues of proximity/separation of their ICE and EV businesses over the next few years will be a potentially far greater driver of their stock prices than items such as US [unit sales announcements] and [earnings forecast] revisions,” Jonas wrote in a Jan. 22 report.

The near-term gross sales outlook can be difficult by chip shortages which have triggered manufacturing delays at manufacturing vegetation of each firms.

The items might separate their methods from their mother or father firms’, with or with out splitting the firms into two, so the market can extra effectively value the sum of their elements, wrote Jonas, who made comparable arguments in an interview with CNBC tv. Recently, he has lauded the good turnaround success GM’s CEO Mary Barra has led throughout her tenure.

Some type of separation would let the EV items entry capital extra cheaply, entice companions extra simply, and presumably shield themselves in opposition to legal responsibility down the street for previous carbon emissions, he wrote. It can also let the EV items of Ford and GM, whose shares have joined the beneficial properties of electrical automobile makers like Tesla and Fisker because the fall, declare the a lot greater value to earnings valuations EV makers command.

Wedbush Securities analyst Dan Ives concurred that the Detroit auto shares, plus Stellantis, created by the Jan. 16 merger of Fiat Chrysler and French automaker Groupe PSA, are due for an improve in price-to-earnings multiples as they get extra of their gross sales from the EV enterprise. But he doubts that it’ll require a full breakup of the businesses.

“As Detroit shows more success in EVs, investors will break down the business with a sum-of-the-parts valuation.” he mentioned. “If you assign an EV-like multiple to even a quarter of their business, their stocks go significantly higher than where they are today.”

Valuing internal-combustion car businesses

Jonas compares the automakers’ internal-combustion businesses to utilities’ coal plants, one-time cash cows that are on their way to obsolescence as wind and solar electricity have become cheaper. Morgan utility analyst Stephen Byrd points to NextEra Energy as one example of a utility that has pivoted to selling renewable energy in unregulated markets as coal’s share collapses, and now trades at a premium to other utilities.

The earnings reports are but the latest step on a journey with an uncertain destination, but a few basic facts can be implied from comparing the financial statements of the “Detroit Two” to those of pure-play electric-car maker Tesla, and from sizing up the valuation placed on the companies’ investments in ride sharing services like Lyft and and GM’s autonomous-driving startup Cruise, which also holds investments from Honda, Microsoft and 40 other firms to develop vehicles that are both clean and self-driving. 

Cruise’s most-recent round of financing, closed in January, valued the company at $30 billion.

Neither company will say it’s considering a breakup plan, and Jonas is known as an iconoclast attracted to contrarian arguments. For example, he has previously argued that Tesla’s stock price underplayed the potential value of its still-nonexistent ridesharing business while overplaying the company’s potential as an automaker alone.

Two different Ford spokespeople didn’t return calls seeking comment.

“We are centered on development and creating value for our clients and shareholders by accelerating our investments in electrical autos and autonomous autos,” GM spokesman James Cain said in an email, adding, “[We are] increasing into new services, lots of that are enabled by our investments in electrification and software program.”

At scale, Tesla‘s track record to date suggests that the EV business, at least at the luxury end, will be more profitable than the business it replaces. Tesla’s gross profit margin of 23% over the last 12 months — meaning every $100 of sales consumes $77 to make vehicle and leaves the rest for marketing, corporate overhead, research and development, and profit — dwarfs the 11% at GM‘s auto unit, or the 6% at Ford in the first nine months of 2019, before the Covid pandemic. In recent investor presentations, Ford has stressed that its near-term EV strategy is focused on commercial vehicles, including its F series pickups, which have wider profit margins than most sedans.

As Apple, which just turned in the highest-profit quarter in stock market history, looks to be serious about manufacturing autos, some analysts have questioned the move based on the industry’s lower margin profile, but that thinking may be outdated, as the Tesla example demonstrates.

1991 Ford F 150 pick up truck, 2000.

National Motor Museum | Getty Images

The financial challenges of making a transition for the automakers also looks manageable.

GM had roughly $26 billion in long-term automotive debt on its balance sheet as of its last quarterly report, and $17 billion in retirement obligations, but since it has almost $37 billion in cash and short-term securities, it’s not a heavily leveraged company. It also has $37 billion in property on its balance sheet, much of which represents factories that can be repurposed to EV manufacturing, CFRA Research analyst Garrett Nelson said. Ford has roughly $23 billion in long-term automotive debt and $10 billion in pension liabilities, but $50 billion in cash and marketable securities, according to its latest quarterly report.

Tesla’s grip on the market

A long list of EV-specific challenges await, said Nelson.

The biggest is that the companies have yet to show they can dent Tesla’s grip on the EV market, or even to stay in the uppermost tier as a flood of new models, and new brands like Rivian and Lucid, hit showrooms over the next three years, he said. Telsa’s market cap now $103 billion, exceeds that of GM and Ford combined.

At GM, the plug-in hybrid Volt was only a modest success before being phased out, and the all-electric Chevy Bolt sold a little more than 20,000 units in the U.S. last year, compared to 48,816 for all varieties of Tesla in July alone. At Ford, the well-received launch of the all-electric Mustang Mach-E last year follows flops on models like the Focus electric subcompact, Nelson said, with an electric F-150 series truck set to arrive in 2022.

“If you are taking out the previous couple of months, Ford and GM’s shares have not performed something for a decade,” Nelson said. “They are below a number of strain to unlock value. The drawback is, they’ve a poor monitor report of execution.”

GM and Ford shares have been lifeless for a lot of the previous 5 years, however have risen lately, particularly GM as EV plans have turn into extra clear.

The firms’ longer-term plans embrace some type of ride-sharing enterprise exploiting next-generation vehicles’ self-driving functionality, however that is an unproven enterprise mannequin. Ride sharing giants Uber and Lyft, which use human drivers, usually are not but worthwhile, and sure opponents embrace Alphabet‘s Waymo unit, Tesla and presumably Apple.

Jonas’ view of the potential of breakup, or different maneuvers to spotlight EV valuation, contributes to his outperform score on GM shares, whereas he lately downgraded Ford to a promote – his second downgrade of the inventory since final November — saying its future appeared extra unsure than GM’s. Nelson predicted in December that each Detroit automakers would see shares lose floor this yr after an enormous rally in 2020. Both shares have risen greater than 30% to this point this yr.

Other Wall Street analysts be a part of Jonas in remaining extra bullish on GM. Credit Suisse analyst Dan Levy lately referred to the automakers’ battle between investing of their worthwhile core companies and unprofitable, but rising, new applied sciences as “near” and “far” clocks. “We see GM as better positioned in a transition to EV/better balancing of the ‘Two Clocks’, while for Ford conversely we see more challenges ahead in the transition to EV,” Levy wrote in a word to buyers early this week earlier than the Ford earnings. On Friday, Credit Suisse downgraded Ford from a purchase to a maintain, with the analyst writing that when the workforce started overlaying Ford the core of the optimistic outlook was that even with the problem in balancing the “two clocks” there was vital alternative for enchancment, however with extra weak steerage and decrease earnings (EBIT), execution threat is rising.

Transportation is the biggest U.S. supply of greenhouse gases that trigger local weather change, and the brand new Biden administration has focused transportation in each its pre-election plans to cut back carbon emissions and its first wave of govt orders.

Early plans from the administration name for the federal authorities to shift its buying of latest civilian autos to these powered by electrical energy, and to shift public transit autos like buses to electrical propulsion. 

But with pure electrical autos nonetheless accounting for lower than 2% of a U.S. automotive market the place as many as 17 million autos are offered yearly, and three% together with hybrids and plug-in hybrids, it is going to take loads to transfer customers that shortly.

The Biden administration’s local weather legislative proposal might embrace an prolonged or expanded set of tax credit to encourage EV adoption, which may be a part of the administration’s broader tax proposals or a transportation invoice to change a five-year spending plan that expires this fall, mentioned Tom Britton, govt director of the Zero Emissions Transportation Association, a commerce group lobbying for all new vehicles to be electrical by 2030. The affiliation needs the tax credit to cowl electrical industrial autos and vans, increasing past present legislation that provides a $7,500 credit score for a lot of as effectively as private transportation, he mentioned.


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