By Alex Kimani
It’s a rare year when boring and stodgy sectors such as automotive garner more investor interest than more trendy sectors such as Big Tech and even biotech. Turns out this is one of those rare years. Stocks of traditional automakers have hit the ground running in the new year, easily outperforming the broader market and even their sexier EV brethren.
Stocks of giant Detroit automakers General Motors (NYSE:GM) and Ford Motor Co. (NYSE:F) have returned 35% apiece in the first six weeks of the new year, outgunning the likes of Tesla Inc. (NASDAQ:TSLA), NIO Ltd (NASDAQ:NIO), Amazon Inc. (NASDAQ:AMZN) and Apple Inc. (NASDAQ:AAPL) which have managed gains of 14.7%, 29.4%, 0.4%, and 1.9%, respectively, over the timeframe.
There’s a method to this madness, though.
After years of hand-wringing, several leading ICE companies have suddenly developed a new green compass and decided to jump into the EV bandwagon wholeheartedly.
Swearing by EVs
Indeed, GM and Ford stocks have just gained a new lease of life after belatedly going all-in into the EV megatrend.
North America’s biggest traditional automaker, General Motors, has just vowed to end production of all diesel and gasoline-powered cars, trucks, and SUVs by 2035 as part of the company’s plan to shift its entire new fleet to electric vehicles.
GM says it plans to use 100% renewable energy to power its U.S. facilities by 2030 and in its global facilities by 2035 and also intends to become carbon neutral in both its global products and its operations by 2040. Further, the automaker says it will focus on offering zero-emissions vehicles across a wide range of price points and work with various stakeholders to build out the necessary charging infrastructure while promoting consumer acceptance.
That does not sound like the usual GM playbook.
But that’s because GM previously supported the Trump administration’s pro-carbon lawsuit that was meant to force California and several other states with gas-mileage standards to lower them to the national standards. GM, however, flipped after Trump lost in November and withdrew from the suit on Nov. 23 after Biden became the clear winner. Since then, GM has announced a raft of electrification plans and managed to endear itself to the clean energy crowd.
In fact, GM has announced plans for 30 new EVs globally under a $27 billion investment in EVs and autonomous vehicles through 2025. That’s a major commitment for a company with trailing 12-month revenues of ~$116B and a market valuation of $80B.
Ford Motors has also started talking big on EVs, recently announcing that it will invest $22 billion in EVs over the same timeframe, double its previous spending commitment of $11 billion.
Meanwhile, Germany’s Daimler AG (OTCPK:DDAIF) has pushed the argument forward by announcing that it intends to split its car and truck making units, with cash flow from the trucking business invested in EVs. Not surprisingly, Daimler stock has gained 70% over the past 52 weeks.
The new NextEra?
The fact that the market is willing to take up legacy ICE makers on their word perhaps demonstrates the sheer enthusiasm surrounding anything deemed green.
However, these ICE giants also have cheerleaders like Morgan Stanley’s Jonas Adam to thank for their sudden rise to glory. Jonas is one of the most prominent iconoclasts in the auto sector. For instance, Jonas has previously argued that Tesla’s stock price underplays the potential value of its still-nonexistent ridesharing business, never mind that the EV maker has enjoyed a six-fold rise over the past year.
Interestingly, Jonas has likened traditional automakers such as GM and Ford to giant utility NextEra Energy (NYSE:NEE), which has been enjoying much better valuations than traditional utilities after embracing renewable energy.
That said, there’s another compelling reason why these ICE companies ought to embrace EVs–profits.
Tesla boasts a trailing 12-month gross profit margin of 23%, dwarfing the 11% at General Motor’s auto unit or Ford’s 6% before the Covid pandemic struck. It’s a big reason why Ford’s near-term EV strategy is focused on commercial vehicles where margins are higher.
And, there’s a precedent that this can be done. BMW (OTCPK:BMWYY) has begun retooling its German plants for EVs and relocating production of ICE engines to Austria and the UK. BMW has a goal for each of its German factories to make at least one fully electric car by 2022.
By Alex Kimani for Oilprice.com