Has Motown Regained Its Mojo? Investors Should Be Skeptical
The barons of media no longer feel burdened with a social obligation to inform the public. Today, they are driven by a fiduciary obligation to entertain consumers.
That’s why most journalists nowadays seek a simple and punchy narrative, a colorful drama that captures the imagination and is easy to understand. Nuanced analysis is avoided, lest it bore the short-attention spans of the modern audience.
One simplistic story currently in vogue on CNBC, Fox Business and the other purveyors of conventional wisdom is the rebirth of Detroit. The uplifting narrative goes something like this:
Once considered dying dinosaurs, America’s iconic automobile brands are back! General Motors (NYSE: GM), Ford (NYSE: F), and Chrysler, now owned by Fiat Chrysler Automobiles (NYSE: FCAU), are incorporating leading-edge technologies, embracing Silicon Valley’s spirit of risk-taking, and breaking new ground in autonomous and electric vehicles (EVs). Even the beleaguered city of Detroit is showing signs of rejuvenation, as trendy shops, boutiques and restaurants blossom amid the bombed-out buildings.
Everyone loves a comeback story. As an investor, you should load up on the shares of these historic names, right? Um, actually, no.
Below, I explain why it’s wise to avoid all three stocks. I also suggest an often-ignored alternative that’s a play on conventional vehicle manufacturing as well as the move toward self-driving cars, EVs, and other transportation advances.
Automotive pioneers in early 20th century Detroit behaved a lot like Silicon Valley entrepreneurs today. They tinkered with exciting new technologies, regularly hopped from one company to the next, launched start-ups and spinoffs, and challenged the status quo. The cross-fertilization of ideas and products in the Motor City revolutionized society.
Detroit’s executives would have you believe that they’ve regained their old mojo. Not so fast.
First, consider the rock-bottom price-to-earnings ratios (P/Es) of GM, Ford and Fiat Chrysler. GM’s trailing 12-month P/E stands at only 5.4. Analysts expect GM’s year-over-year earnings growth to come in at -9.1% for the current quarter, -1.0% for the current year, and -4.6% over the next five years, on an annualized basis.
Ford’s trailing P/E is 12. Earnings growth is pegged at -15.4% for the current quarter and -13.1% for the current year. Ford’s five-year annualized earnings growth rate is pegged at -11.9%.
Fiat Chrysler’s trailing P/E is 7.6. The company’s earnings projections are positive, but the Chrysler brand is only one sliver of the conglomerate’s overall pie.
If you rank the members of the S&P 500 index in order of their P/E ratios, Ford and GM reside near the bottom, among the corporate zombies. A measly P/E doesn’t always denote an attractive bargain. It also can be Wall Street’s way of saying your method of doing business is in trouble.
Let’s look at three rivals that are threatening Detroit.
EV-maker Tesla (NSDQ: TSLA), Alphabet’s (NSDQ: GOOGL) autonomous car division Waymo, and ride-sharing “unicorn” Uber are each worth more than GM, Ford, or Fiat Chrysler.
The strategists at Morgan Stanley (NYSE: MS) calculate that Uber is likely valued at between $50 billion and $70 billion, and Waymo could soon be worth at least $70 billion. The investment bank estimates that Waymo could be worth a whopping $200 billion by 2030. Meanwhile, the market valuations of GM, Ford and Fiat Chrysler are $52.2 billion, $44.8 billion, and $16.4 billion, respectively.
To be sure, plenty of hype is generating excessive expectations for Uber, Tesla and Waymo. But their appeal to investors has pressured the major automakers into desperately announcing high-technology initiatives, some of which are more sizzle than steak.
In May, Ford fired CEO Mark Fields, swapping him for Jim Hackett. A glance at Mr. Hackett’s CV shows that his total experience as an auto executive entails 15 months managing Ford’s tech incubator.
Mainstream automakers are trying to get in front of the booming EV trend. Last week, the venerable Swedish auto maker Volvo (OTC: VOLVF) announced that beginning in 2019, all new Volvo models will be hybrids or battery-powered EVs. Also last week, the French government announced that it would ban sales of petrol and diesel vehicles by 2040, as part of its plan to meet targets under the Paris climate accord.
At the same time, driver-less cars and ride-sharing services are expected to rack up explosive growth in coming years, as the technology becomes ever-more practical.
The Detroit giants are touting the ways in which they’ve tried to co-opt these trends. GM bought a 9% stake in Lyft (a rival to Uber) and in 2016 paid $600 million for Cruise, an autonomous-vehicle firm based in San Francisco. GM’s OnStar division links 7 million drivers to data services such as voice-guided navigation. The Chevy Bolt, GM’s EV offering, now plies the roads.
Ford operates Chariot, a crowd-sourced shuttle service, and expects to launch 13 electric car models by 2020. Ford also plans to invest $1 billion over the next five years in Argo, a tech firm that’s developing artificial intelligence-based software for self-driving vehicles.
Sounds great, right? Problem is, while the Detroit behemoths try to move more nimbly, they could be setting themselves up for expensive stumbles.
If history is any guide, these new tech-oriented divisions could become cash sinkholes that launch a lot of breathless press releases but few moneymaking products. Case in point: as they tried to respond to the threat from Japanese automakers in the 1980s, Detroit OEMs wasted billions of dollars on robotic systems that didn’t work properly and failed to stem the tide of imports.
In 2017 and beyond, the big car companies could make a lot of foolhardy acquisitions for overpriced technology darlings that eventually don’t pan out. Activist investors also could demand that the sexy tech divisions get sold or spun-off.
Meanwhile, cars sales are starting to enter a cyclical downturn. After several years of growing sales that cheered Detroit’s boosters, the U.S car industry racked up a weak first half of 2017. Sales to the end of June fell by 2.1% compared to the same six-month period a year ago.
The upshot for investors: the automobile industry is undergoing a genuine upheaval, but the identities of the winners and losers remain unclear. Don’t pile into auto stocks based on glib narratives; the true picture is muddier. Pick your spots carefully.
If you want to invest in a stock that’s a play on the conventional as well as innovative aspects of the auto industry, consider a company that almost no one talks about: Delphi Automotive (NYSE: DLPH).
With a market cap of $23.8 billion, U.K.-based Delphi manufactures vehicle components, such as electrical and electronic, powertrain, and safety technology, for several automotive and commercial vehicle OEMs worldwide.
Delphi also serves the aftermarket and has made forays into the latest technology. In May, Delphi joined with BMW (OTC: BMWYY) and Intel’s (NSDQ: INTC) Mobileye in a partnership to develop the essential components of autonomous vehicles. Because of its broad client base, Delphi will come out a long-term winner in the automobile industry’s shake-out, even if certain OEMs fall short in their efforts at reinvention. For further details on Delphi, see my June 29 issue.
Send your comments and questions to: firstname.lastname@example.org — John Persinos
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