Stock Analysis & Ideas

2 Solid Auto Stocks Taking a ‘Hybrid’ Approach to Electrification

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Although many Wall Street experts anticipate a substantial pivot to the electrification of mobility, several factors suggest that combustion-powered transportation still offers relevance. Therefore, investors may want to take a hybrid approach with iconic auto stocks TM and GM.

It’s a mantra that few investors can escape: electric vehicles are the future. On so many levels, this narrative makes sense. From energy efficiencies to zero-emissions footprints, EVs represent a viable solution to modern-day challenges. Yet, ongoing economic and infrastructural obstacles suggest that combustion power will remain relevant for some time. Therefore, investors may want to take a hybrid approach to mobility with two iconic auto stocks, TM and GM.

Fundamentally, the inclusion of legacy auto stocks that made their living through dirty fossil fuels may seem strange in a discussion about the future of transportation and mobility. Primarily, no matter how efficient a combustion engine becomes, it still produces carbon-based emissions. Since government agencies are increasingly committed to addressing the consequences of climate change, adding to the problem seems foolish.

However, the broader push for EV integration faces numerous challenges, particularly in the economic sphere. An issue that I mentioned several times before, the average transaction price for a new EV this year comes out to $62,876. Since this data point originated early in 2022, this stat could realistically be higher today. Given that U.S. median household income is about $71,000 right now, the transition to EVs is more difficult than many realize.

Another factor comes down to the practicalities of wider EV integration. As TipRanks contributor Yulia Vaiman bluntly stated, “it’s the infrastructure, stupid.” Vaiman is correct. Society can talk up a storm about the future EV rollout. However, with 63% of housing units in the U.S. having access to a garage or carport, many Americans will need public charging. Thus, the infrastructure issue cannot be ignored.

If that wasn’t problematic enough, evidence indicates that the Biden administration’s goal of electrifying half of the U.S. fleet by 2030 is very aggressive. Presumably, a more conservative approach is to build up the integration gradually. The below car manufacturers are doing just that, making them intriguing auto stocks to consider.

Toyota (NYSE:TM)

One of the biggest auto stocks in the world, Toyota long represented a beloved brand for its reasonable prices and excellent reliability. However, the company, over recent months, attracted criticism for refusing to go all-in on EVs. Instead, Toyota will, in addition to exploring battery-powered EVs, continue to produce hybrid vehicles.

Of course, the main contention here is that hybrids – though cleaner and more efficient than traditional combustion cars – still burn fossil fuels. Therefore, they generate emissions that impose a carbon footprint. As well, consumers arguably prefer the full EV experience, not a half-baked one.

However, consumer surveys reveal that people understandably have concerns about making the full transition. Again, not every household has access to a garage or carport. That makes at-home charging a moot point. Therefore, if adequate charging does not exist in certain regions, consumers there may have little choice but to stick with combustion.

Fortunately, Toyota provides flexibility for consumers, meaning this is one of the auto stocks that can win out despite the fierce criticism.

Financially, there’s plenty to like about the Japanese automaker. For one thing, it features a three-year book value growth rate of 10.7%, ranked better than over 74% of the competition. As well, the company has a return on equity of 10.6%, superior to 69% of its peers. Such a stat also reflects the high-quality nature of Toyota’s business.

Is TM Stock a Buy, According to Analysts?

Turning to Wall Street, TM stock has a Hold consensus rating based on zero Buys, two Holds, and zero Sell ratings. There are currently no price targets for TM stock that were assigned within the past three months.

General Motors (NYSE:GM)

Although General Motors is not nearly as gung-ho as Toyota in adopting a half-in, half-out approach, the American auto giant still carries a balanced profile that contrasts with the all-in nature of other auto stocks. However, General Motors may be the one laughing all the way to the bank.

Within automotive circles, GM dropped a bombshell when it debuted its eighth-generation Corvette with a mid-engined format – the first in the brand’s history. Naturally, sales demand skyrocketed. Back in June 2021, management stated that it wasn’t even close to keeping up with demand for the new Corvette.

Earlier this year, sales data demonstrated that the sports car continued to attract heavy interest. This circumstance demonstrates that if car manufacturers develop and deliver vehicles that consumers want, the powertrain doesn’t matter. After all, the Corvette features a hearty V8 engine, hardly aligned with modern sensibilities of zero emissions.

Still, this doesn’t mean GM has no interest in EVs. Far from it, the company electrified its popular brands like the Hummer. Because of this appeal, GM may be one of the better auto stocks to buy. The company gives the EV folks what they want while delivering muscle-car excitement for the true enthusiasts.

Financially, GM represents a modestly-undervalued business. While its longer-term growth rate isn’t that hot right now, over time, its compelling product lines, such as the Corvette and the electric Hummer, should pad up this statistic. Presently, though, contrarians can take advantage as the company’s forward price/earnings ratio sits at a pedestrian 5.3x.

Is GM Stock a Buy, According to Analysts?

Turning to Wall Street, GM stock has a Moderate Buy consensus rating based on 11 Buys, four Holds, and zero Sell ratings. The average GM price target is $53.79, implying 57.05% upside potential.

Conclusion: It’s the Smarter Approach

While investors can appreciate why going all-in on the EV transition is appealing, the smarter approach is to be more conservative. Simply, society does not yet know if it can reach 50% integration in seven or eight years’ time as various economic and infrastructural challenges remain. Auto stocks like TM and GM represent a moderated approach to the unknown, which is arguably prudent.

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