After 25 years of following auto stocks, first as a sell-side analyst and now as an impartial observer, I get a strange tingle every time the group is "hot" among investors. The current mania regarding autonomous mobility and propulsion systems other than internal combustion engines (ICEs) reminds me of the dot-com era.
A basic rule of thumb that I learned in my days as a cub analyst at Lehman Brothers is "buy auto stocks when things look bad." Well, things look pretty darn good, with industry sales up 6.1% in September in the U.S. and the Chinese and European markets also showing pronounced strength. Also, the year-to-date stock price performances might indicate there is less value in this sector than there was before the election:
Fiat Chrysler (FCAU) +90%
Tesla (TSLA) +53%
General Motors (GM) +30%
These are heady times for auto stocks, and it would be churlish of me to point out that Ford (F) stock has not joined the party, posting an invisible 0.04% gain thus far in 2017. I'm not going to waste column inches heaping scorn on the Blue Oval company -- although it is so easy to do -- but I am also not buying Ford shares simply because they haven't risen. That is really a dumb investing rationale.
However, I also have a constitutional hesitancy to "chase" auto stocks. If you believe autonomous mobility is the future, you can either:
- Pay 7.3x next year's earnings for GM and hope the market continues to ignore the company's volume declines, as GM's U.S. unit shipments fell in the third quarter.
- Pay 7.3x next year's earnings for Fiat Chrysler. It appears FCAU is behind the curve on advanced mobility solutions, and that might just be the catalyst to have management sell the company, with Volkswagen the most likely buyer. I believe that has driven the stock's strong performance thus far in 2017.
- The market doesn't even accord Ford that 7.3x multiple -- it's at 6.9x on 2017E EPS -- but based on earnings released this morning, there is just nothing to get excited about in Dearborn.
- In contrast, Tesla CEO Elon Musk is a master at generating excitement, but that doesn't hide TSLA's large -- and I believe intensifying -- cash burn problem. I'll have more on TSLA ahead of its earnings report next week, but the more I look at the numbers, the more I think the Street is going to be amazed at how much cash Tesla consumed in the third quarter and will continue to consume for the next two years.
So that's a quick bullet-pointed argument against the four major U.S. auto OEMs. But that's not the whole story in autos. Suppliers are just as exposed to emerging automotive trends as their customers, and in fact will supply much of the content for self-driving cars while enabling the electrification of the power train for those of us who prefer to steer.
An interesting play on greater vehicle electrification (in cars with ICEs as well hybrids and electrics) is BorgWarner (BWA) . It has been positioned as a company that can improve performance in ICE vehicles with its turbochargers, but I believe the market has underestimated the amount of technology required to efficiently control an engine and how transferrable those electronics are to hybrid and pure-electric power trains. BWA has bolstered this capability through a series of acquisitions, including the recent purchase of U.K. battery electric firm Sevcon.
This morning, BWA posted very impressive third-quarter results, a classic "beat and raise" with 9% revenue growth, terrific margins and a boost to management's guidance for 2017 earnings. At the midpoint of management's new, higher guidance range for 2017 EPS -- $3.82 -- BWA shares are trading at 13.9x this year's earnings. BWA shares hit a 52-week high this morning, so it is not a bargain play. But, really, nothing else in the sector is other than eternal value trap Ford. Auto parts companies will always receive a premium to the OEMs because they don't have to deal with the vagaries of selling cars to consumers, and it's more insightful to view BWA as trading at a 30% discount to the market than at a 100% premium to its customers.