Stock Analysis & Ideas

Auto Stocks: Which Value Stock Will Out-Drive the Current Volatility?

Stock markets are highly volatile this year and the macroeconomic conditions have been relentless in dragging down share prices across the board. The S&P 500 (SPX) has dropped around 16.6% this year while the Nasdaq Composite tanked 25.9%. Inflation is soaring and the Fed has been raising interest rates in a hawkish monetary policy stance. Even cryptocurrencies like Bitcoin (BTC) have not been immune to this downward spiral, with the preeminent digital currency losing around 34% of its value so far this year.

In this scenario, investors seem to have been playing into the ‘buy the dip’ advice, per a Wall Street Journal report from May 10. Goldman Sachs data showed that small investors have invested $114 billion in U.S. stock funds through March.

But where can investors safely park their cash in such a volatile environment? To answer that question, value stocks seem to be a good answer. Value stocks are companies which the market prices them at lower valuations, compared to their intrinsic value and strong fundamentals.

Using the TipRanks stock comparison tool, we looked at value stocks in the automobile sector that have switched to electric vehicles (EVs) in a big way, and decided to pit three such stocks, Ford, General Motors, and Volkswagen AG against each other. We will also examine what Wall Street analysts have recently been saying about these stocks.

General Motors (NYSE: GM)

The legacy automaker has decided to go electric in a big way. In June last year, the company unveiled a plan to boost its investment in EVs and autonomous vehicles (AVs) to $35 billion between 2020 and 2025.

By 2025, GM expects to launch more than 30 EV models in North America and China and anticipates selling more than 1 million EVs on a global basis by 2025. The company’s EV push also includes increasing the Ultium battery cell production in the U.S. and the commercialization of Ultium batteries and Hydrotec fuel cells made in the U.S.

While GM delivered mixed results in Q1, it expects to rapidly ramp up production of six Ultium-based EVs between this year and the middle of next year.

In a recent report on the stock, Berenberg analyst Adrian Yanoshik that that this is a “critical phase” for GM’s EV releases “following a recall of Chevrolet Bolt EVs and its lagging of Ford’s introductions in the important crossover SUV and pick-up segments.”

However, the analyst remained confident that GM would meet its target of sales of 400,000 EVs by 2023 and 1 million EVs by 2025.

In a push towards EVs, the company is also strengthening its supply chain by establishing strategic relationships for the long-term with suppliers in North America and Australia. Yanoshik is of the view that GM’s focus on the supply chain will also mean that its Ultium platform “will inevitably take longer to execute.”

However, the analyst is confident that GM will continue to generate strong free cash flows (FCFs) of $7 billion this year and FCF will continue to be high through 2024. Yanoshik added, “We believe that it can sustain this high level, even during its high-investment cycle into its EV transition, by winding down its ICE [internal combustion engine] investments.”

As a result, Yanoshik initiated a Buy rating and a price target of $55 on the stock, implying an upside potential of 42.1% at current levels. The stock is currently hovering near its 52-week low with a closing price of $38.70 on May 10 and has tanked 36.7% year-to-date.

The rest of the analysts on the Street also side with Yanoshik’s bullish stance on the stock, resulting in a Strong Buy consensus rating based on 12 Buys and two Holds. The average GM stock forecast is $63, implying a 62.8% upside potential to levels seen early on Wednesday.

Ford Motor Co. (NYSE: F)

Ford is also going electric and intends to reach an EV manufacturing capacity of 600,000 globally by the end of next year. With the aim to achieve this, Ford is in the process of “ramping up battery supplies, on the way to making more than two million EVs annually by the end of 2026.”

According to RBC Capital analyst Joseph Spak, the automobile giant is addressing battery supplies concerns through an investment of more than $50 billion.

While the analyst approves of Ford’s recent F-150 shipments, Spak thinks that the company will need to change its strategy when it comes to the pricing of its vehicles.

The analyst pointed out that currently, higher production costs “are hitting Ford from all angles: commodities, inflation, [and] supplier recoveries.” As a result, the company’s current pricing level for its vehicles could be “unsustainable.”

While Spak is optimistic that Ford will be able to transition to a battery electric vehicle company, in his view, the “path from now to then could be choppy.”

As a result, the analyst remained sidelined with a Hold rating and a price target of $18, which implies an upside potential of 34.8% at levels seen Wednesday morning.

Other analysts on the Street are cautiously optimistic with a Moderate Buy consensus rating based on eight Buys, eight Holds, and two Sells. The average Ford stock forecast is $20.53, implying a 53.8% upside potential to current levels.

Volkswagen AG (OTC: VWAGY)

Volkswagen, the German automobile giant is also going electric. The company plans to manufacture and sell around 3 million all-electric cars every year by 2025. VW had stated back in January last year that it plans to invest €73 billion in digitalization, electric mobility, and hybridization. This investment is closer to the group’s entire market capitalization of €88 billion.

Herbert Diess, Chairman of Volkswagen AG stated, “Electric mobility has become our core business. Now we are systematically integrating additional levels into the value chain.”

This push towards going electric has also been reflected in the company’s Q1 results where the share of all EVs as a part of its deliveries more than doubled from an earlier 2.5% to 5.2% in Q1. What’s more, Volkswagen delivered 99,064 all-electric vehicles globally in Q1, a big jump of 65.2% year-over-year.

However, Berenberg analyst Adrian Yanoshik believes this significant investment in going electric could expose the company “to rising battery input costs and semiconductor disruption.”

Moreover, according to the analyst, VW currently corners the highest market share of around 16% in China among its peer group and is targeting a doubling of sales of its battery electric vehicles this year.

However, Yanoshik expects that falling government stimulus towards EVs this year, COVID-19 lockdowns, and rising competition in China could pressure VW’s volumes in that country.

Giving his investment rationale for the stock, Yanoshik commented, “Due to industry uncertainty, we prefer OEMs [Original Equipment Manufacturers] with greater margin resilience and near-term cash generation, even as a partial IPO of Porsche AG could re-rate the shares by year-end.”

Yanoshik is the only analyst who has covered the stock in the past three months. The analyst, while initiating coverage on the stock, remains sidelined with a Hold rating and a price target of €175 ($184.32) on the stock.

Bottom Line

It is important here to note that currently, GM, Ford, and Volkswagen, are trading below the automobile industry’s price-to-earnings ratio of 13.5 times with P/E ratios of 6.42x, 4.7x, and 8.7x, respectively.

This indicates that there is a possibility that investors are undervaluing these stocks. While analysts are upbeat about GM, they are cautiously optimistic about Ford, and analyst Yanoshik is sidelined about VW.

In this scenario, GM appears to be the best of the batch.

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