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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Four Stocks To Watch In The Driverless Vehicle Industry

For all of the talk about self-driving vehicles, the reality is that widespread self-driving cars for the average consumer are still likely to be years away. The parts need to make a self-driving vehicle function effectively are still quite expensive and it’s likely to take up to a decade before the prices on those parts come down enough to start making their way into mid-price automobiles. On top of that, there are a lot of regulatory issues that need to be worked out before driverless cars hit the roads in earnest.

That said, self-driving or autonomous vehicles do represent a huge potential technological advancement in transportation. No market sector is more likely to adopt autonomous vehicle technology than the energy industry. There are enormous transportation and logistical costs in the energy field. With firms across the space looking to gain efficiency wherever they can, self-driving vehicles provide an obvious opportunity. For evidence of that, one need look no further than Suncor’s testing of self-driving Komatsu dump trucks in Alberta. Related: Forget The Noise: Oil Prices Won’t Crash Again

Savvy investors should look at this as an opportunity to invest in those firms that will make the autonomous-driving technological revolution possible. Google is one widely talked about play in the space, but they are a very visible beneficiary, and already an enormous company so the benefits there are likely to be small. Instead, investors should be looking for smaller under-the-radar names that could benefit. Many of the companies poised to benefit from the trend are not household names.

One such company is recent IPO Mobileye. The company did its IPO last fall and since then, the road has been mixed. MBLY is definitely a high-tech company and with that label come the rapid stock price gyrations one would expect. There are positive things happening at the firm though, such as the NTSB’s recent recommendation that collision avoidance systems become standard on all vehicles. Overall, MBLY is probably the most pure-play stock on the autonomous vehicle trend, but that lack of business diversification means greater risks.

A second alternative for investors in the area is Freescale Semiconductor. The company recently announced a tie-up with competitor NXP Semiconductor, and the resulting firm should be "a powerhouse in autos, microcontrollers (MCUs), and the Internet-of-Things (IoT)" according to Needham analysts. Related: Oil Markets Could Be In For A Shock From China Soon

FSL’s parts already are used by Komatsu and Caterpillar (NYSE: CAT) in the manufacture of their self-driving dump trucks and more business is very likely to stem from that in the future. FSL is not cheap (and NXPI is even more expensive), but given the growth potential in the area and the fact that FSL is profitable, the stock is certainly worth considering especially on one of the inevitable pullbacks that accompanies these types of growth stock stories. Freescale and NXPI are already trusted suppliers in the industry and both are thought-leaders in their field. Given those factors, the names should definitely be on energy-tech investor watch lists.

Finally, the last beneficiary in the autonomous space is decidedly more well-known, but perhaps not as a tech company. Caterpillar is already manufacturing self-driving vehicles for some of its customers, and those vehicles are likely to become an important product for the firm over the next decade.

The company may not get the press that Google does when it comes to driverless vehicles, but its products provide a clear economic benefit for customers, and as such, wide-spread adoption across the industry is almost inevitable. Caterpillar is a worthy rival of Komatsu around the globe, and given the pull back in energy stocks and mining, the company sports an attractive valuation. Related: Busting The “Canadian Bakken” Myth

Peers like Joy Global are also going to be interested in the driverless vehicle market, but that doesn’t matter – given the economics surrounding the opportunity to eliminate $50K-$150K in annual costs on a given vehicle by not having a driver – as the technology starts to take hold in the industry, it will create a massive upgrade cycle which should provide substantial opportunities for all manufacturers with a quality product. And CAT leads that list. Investors should take note.

By Michael McDonald of Oilprice.com

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