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

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

With President Biden dedicated to pushing electric vehicles as part of both his climate and trade policies, coupled with hot financial markets ready to finance nearly anything green, pressure is building on automakers to go beyond nibbling at the edges of their strategy and remake themselves entirely to chase the electric-car revolution.

The stakes are heating up in the auto industry as technology titans such as Apple edge closer to finalizing a deal with Hyundai-Kia to manufacture an Apple-branded autonomous electric vehicle at the Kia assembly plant in West Point, Georgia.

Influential Morgan Stanley auto analyst Adam Jonas is leading the discussion about whether automakers like General Motors and Ford would be better off splitting in two, or making other moves designed to isolate the value of their electric vehicle franchises from the internal combustion engine (ICE) cars and trucks that GM, at least, says it will wholly replace with EVs by 2035. Toward that goal it has plans for 30 new EVs globally under a $27 billion investment in electric and autonomous vehicles through 2025. Germany’s Daimler pushed the argument forward by announcing Wednesday that it would split its car and truck making units, with the truck company’s cash flow devoted to financing its push into electric vehicles.

Ford announced with its earnings on Thursday afternoon that it will invest $29 billion in EVs and autonomous vehicles through 2025, $22 billion in EVs specifically, which represented a doubling of its previously stated $11 billion spending commitment. That is still short of GM’s all-EV 2035 timeline — its earnings are set to be reported next week.

Jonas is arguing that the market may be undervaluing the companies’ electric vehicle businesses, though he is only bullish on GM among the two. He says investors may also be overvaluing the companies’ legacy businesses, which in each case is carrying a lot of debt and has tens of billions of dollars tied up in factories and equipment that will have to be either retooled or mothballed over the next decade or more. He says investors need to look beyond quarterly earnings to capture the most important catalysts for these companies in the future.

“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 sales outlook is also complicated by chip shortages which have caused production delays at manufacturing plants of both companies.

The units may separate their strategies from their parent companies’, with or without splitting the corporations into two, so the market can more efficiently value the sum of their parts, wrote Jonas, who made similar arguments in an interview with CNBC television. Recently, he has lauded the great turnaround success GM’s CEO Mary Barra has led during her tenure.

Some form of separation would let the EV units access capital more cheaply, attract partners more easily, and possibly protect themselves against liability down the road for past carbon emissions, he wrote. It may also let the EV units of Ford and GM, whose stocks have joined the gains of electric vehicle makers like Tesla and Fisker since the fall, claim the much higher price to earnings valuations EV makers command.

Wedbush Securities analyst Dan Ives concurred that the Detroit auto stocks, plus Stellantis, created by the Jan. 16 merger of Fiat Chrysler and French automaker Groupe PSA, are due for an upgrade in price-to-earnings multiples as they get more of their sales from the EV business. But he doubts that it will require a full breakup of the companies.

“As Detroit shows more success in EVs, investors will break down the business with a sum-of-the-parts valuation.” he said. “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 focused on growth and creating value for our customers and shareholders by accelerating our investments in electric vehicles and autonomous vehicles,” GM spokesman James Cain said in an email, adding, “[We are] expanding into new products and services, many of which are enabled by our investments in electrification and software.”

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 take out the last few months, Ford and GM’s stocks haven’t done anything for a decade,” Nelson said. “They are under a lot of pressure to unlock value. The problem is, they have a poor track record of execution.”

GM and Ford shares were lifeless for much of the past five years, but have risen recently, especially GM as EV plans have become more clear.

The companies’ longer-term plans include some form of ride-sharing business exploiting next-generation cars’ self-driving capability, but that’s an unproven business model. Ride sharing giants Uber and Lyft, which use human drivers, are not yet profitable, and likely competitors include Alphabet‘s Waymo unit, Tesla and possibly Apple.

Jonas’ view of the potential of breakup, or other maneuvers to highlight EV valuation, contributes to his outperform rating on GM shares, while he recently downgraded Ford to a sell – his second downgrade of the stock since last November — saying its future seemed more uncertain than GM’s. Nelson predicted in December that both Detroit automakers would see shares lose ground this year after a big rally in 2020. Both stocks have risen more than 30% so far this year.

Other Wall Street analysts join Jonas in remaining more bullish on GM. Credit Suisse analyst Dan Levy recently referred to the automakers’ battle between investing in their profitable core businesses and unprofitable, yet emerging, new technologies 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 note to investors early this week before the Ford earnings. On Friday, Credit Suisse downgraded Ford from a buy to a hold, with the analyst writing that when the team began covering Ford the core of the positive outlook was that even with the challenge in balancing the “two clocks” there was significant opportunity for improvement, but with more weak guidance and lower earnings (EBIT), execution risk is rising.

Transportation is the largest U.S. source of greenhouse gases that cause climate change, and the new Biden administration has targeted transportation in both its pre-election plans to reduce carbon emissions and its first wave of executive orders.

Early plans from the administration call for the federal government to shift its purchasing of new civilian vehicles to those powered by electricity, and to shift public transit vehicles like buses to electric propulsion. 

But with pure electric vehicles still accounting for less than 2% of a U.S. car market where as many as 17 million vehicles are sold annually, and 3% including hybrids and plug-in hybrids, it’s going to take a lot to move consumers that quickly.

The Biden administration’s climate legislative proposal may include an extended or expanded set of tax credits to encourage EV adoption, which could also be part of the administration’s broader tax proposals or a transportation bill to replace a five-year spending plan that expires this fall, said Tom Britton, executive director of the Zero Emissions Transportation Association, a trade group lobbying for all new cars to be electric by 2030. The association wants the tax credits to cover electric commercial vehicles and trucks, expanding beyond current law that gives a $7,500 credit for many as well as personal transportation, he said.

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