Despite persistent supply chain snags, the automobile sector comfortably outperformed the broader market over the past year. Over the past 12 months, the S&P 1500 Composite Automobiles Index posted a 53.7% return compared to 23.4% by the iShares Russell 1000 Growth ETF and 26.1% by the S&P 500.
A big reason for the outperformance can be chalked up to the EV revolution.
Last week, the Department of Energy reported that 13 new U.S. electric vehicle battery plants are expected to be operational by 2025 in addition to Tesla Inc.'s (NASDAQ:TSLA) Austin gigafactory. The opening of battery plants by traditional automakers Ford Motor Co. (NYSE:F), General Motors (NYSE:GM)), Stellantis N.V. (NYSE:STLA), Toyota Motor Corp. (NYSE:TM), and Volkswagen AG (OTCPK:VWAGY) highlights a monumental shift from ICE vehicles to EVs and has been well-received by the investing universe.
The global chip shortage has been impacting carmakers differently, causing uneven effects down the supply chain. After spending 90 years as the top-selling automaker in America, General Motors has lost its sales crown to Japan's Toyota, which also became the first non-domestic automaker to take the top spot. Newly released figures showed U.S. sales for Toyota jumped 10% Y/Y in 2020 to 2.3M, compared to the 2.2M vehicles sold by GM, whose sales were down 13% for 2021.
Morgan Stanley has predicted that 2022 will be a year of execution for the auto industry. Lofty car prices are expected to persist amid an inventory crunch, with those being able to deliver poised for outsized gains.
Here are some top auto picks for 2022.
#1.Ford Motors Ford Motors has lately been making serious inroads into the electrification drive.
The company is set to introduce the all-electric F-150 Lightning by the middle of 2022. The F-150 Lightning will have a range of 300 miles with an extended-range battery. A 0-to-60 mph speed of four seconds with a base price of $39,974.
Although the company sold a modest 21,703 units of its all-electric Mustang Mach-E through the first ten months of the year, according to Motor Intelligence, Morgan Stanley forecast Ford's EV unit sales will reach 150K in FY22 to rep 3.5% of Ford's volume, 473K units in FY25 to rep 11.5% of volume and 1.24M units by FY30 to represent 34% of volume. Ford has already overtaken General Motors (NYSE:GM) in EV sales in the United States.
Further, Ford has already taken 200K reservations for its hotly anticipated F-150 Lightning pickup truck and plans to start converting reservations to full orders in January 2022, thus beating GM's Chevy Silverado to the market by a full year. The F-150 Lightning pickup truck is an all-electric version of Ford's best-selling passenger vehicle in the market, the F-150.
For clean energy buffs, Ford's latest EV offering is, by many accounts, a masterpiece.
According to the company, it will be the first electric vehicle to serve as a "battery on wheels," thanks to being equipped with an extended 9.6kWh battery that can power an average home for three days. Ford says the F-150 Lightning's 9.6 kWh of Intelligent Backup Power can provide full-home power for up to three days on a full battery charge, a potential strong selling point following February's Arctic Blast that left millions of homes in the dark for days on end. Demand for in-home generators in Texas has reached an all-time high since the February ice storms, meaning the battery system 'add-on' might have broad appeal to light truck buyers.
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Solar, battery storage, and energy services provider Sunrun Inc. (NASDAQ:RUN) has partnered with Ford to install the 80-amp Ford Charge Station Pro and home integration system that can be used to power the Intelligent Backup Power system.
Ryan O'Gorman, Ford's energy services lead, says that if your F-150 Lightning is plugged in when an outage occurs, Intelligent Backup Power will automatically kick in to power your home. When power is restored, the truck will automatically revert to charging its battery. Users will have to pay extra to install a home integration system on top of the Lightning's base price of $39,974 before any incentives.
Ford shares soared 140% last year, beating Tesla and cross-town rival General Motors.
#2. Tesla
For yet another year, the EV kingpin, Tesla Inc. (NASDAQ:TSLA) has cemented its credentials as one of the few electric vehicle manufacturers ready to challenge the ICE hegemony.
TSLA shares soared after the company delivered a Q4 report that topped expectations and led to speculation over just how many cars it can deliver in 2022. Morgan Stanley says that 2M deliveries in the current year could still be in the crosshairs given the automaker tallied 308K deliveries in Q4 of 2021 amid supply chain pressures. Analyst Adam Jonas also sees a plant mix benefit as Tesla produces vehicles from locations other than Fremont.
Another important milestone: Tesla now boasts one of the highest operating margins in the vehicle manufacturing business at nearly 15%.
But the EV company might be able to expand its already impressive margins by pulling off another nifty trick: Deploying cheap, cobalt-free batteries in its cars.
In a previous investor presentation, Tesla revealed that it's switching battery chemistry for all standard-range Models 3 and Y from nickel cobalt aluminum (NCA) chemistry to an alternative, older technology that uses a lithium iron phosphate (LFP) chemistry.
LFP cells not only have much longer useful lifetimes but are also cheaper than NCA or nickel manganese cobalt (NMC) cells. The biggest trade-off is that LFP batteries have a lower energy density. However, LFP batteries are still able to compensate for this shortcoming by dramatically cutting on thermal runaway in the event of a crash, meaning an LFP battery pack requires much less volume on cooling and structural protection to keep the cells separated.
Many electric buses in China already use LFP batteries. Last year, Tesla introduced LFP batteries in its standard range Model 3s in China and dropped the starting price from 309,900 yuan ($48,080) to 249,900 yuan ($38,773). CEO Elon Musk has revealed that the improving energy density of LFP batteries now makes it possible to use the cheaper, cobalt-free batteries in its lower-end vehicles so as to free up more battery supply of lithium-ion chemistry cells for Tesla's other models.
Up to now, intellectual property restrictions have kept LFP cells mostly within China. But Tesla will now be able to deploy them in its pivotal U.S. market after it won approval from the Chinese government to start using LFP batteries in Chinese-made BEVs in 2020. Indeed, Tesla is making the switch to LFP mandatory in all its markets after a positive reception in the U.S.
Last December, Bloomberg NEF, a clean energy research service that has been, among other things, tracking battery costs, announced that battery costs had dipped below the $100 per kWh threshold for the first time ever. The crucial milestone was achieved for battery packs designed for electric buses in China.
In the EV industry, the $100 per kWh battery cost price point is generally regarded as the Holy Grail critical for the wider adoption of electric vehicles by making them cost-competitive at the sticker price, which remains an important psychological barrier for many potential buyers. The powertrain typically accounts for more than 70% of the cost of an EV. Tesla's LFP switch not only means fatter margins but can fast track the company in the race to $100 per kWh leading to longer growth runways.
TSLA shares are up 48.0% over the past 12months.
#3. Rivian
On November 10, San Jose, California-based electric vehicle maker Rivian Automotive Inc. (NASDAQ:RIVN) became the latest name to join the ever-growing list of EV manufacturers going public.
As widely expected, Rivian's IPO was another blockbuster after the company managed to raise about $13.5 billion by selling 175.95 million shares at $78 a pop. RIVN shares would go on to hit an intra-day high of $179.47 six days later before falling back to earth to trade close at $96.84 on Tuesday's intraday session. Amazingly, RIVN still boasts a market cap of $91.3 billion, a no-mean feat for a company that currently generates nearly zero revenue.
Morgan Stanley has tapped Rivian as its #2 auto pick for 2022 saying:
"A call option on Amazon's need to address existential CO2 emissions. A clean-sheet strategy with deterministic capital (raised ~$25bn) focused on adventure and commercial fleets. While 2022 will see ups and downs while in 'ramp mode' we think Rivian is 'The One' for your EV portfolio."
Amazon Inc. (NASDAQ:AMZN) participated in no less than four funding rounds for Rivian, paying $1.35 billion, and also bought $490 million in convertible debt before buying 2.56 million shares worth $200M at the IPO. Overall, Amazon owns an 18.5% stake in Rivian after the IPO and holds 16.9% of the voting power. Related: Oil Perks Up With Another Crude Inventory Draw
Meanwhile, Ford paid a total of $820 million for Rivian's Series B and D offerings and also bought $415 million of the EV maker's convertible debt offering. Those early investments are now worth over $13 billion, meaning Ford owns a ~12% stake in Rivian and 10.5% of the voting power.
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Both Amazon and Ford are large, deep-pocketed investors who are unlikely to engage in panic selling at the first signs of trouble. This gives Rivian a level of stability that many early-stage EV startups lack.
#4. Ferrari
Ferrari N.V.(NYSE:RACE) is one of Italy's top manufacturers of luxury performance sports cars. RACE has been one of the better-performing car stocks ever since the company went public in October 2015, notching a 410% return over the timeframe thanks mainly to the company's stellar profit record. Ferrari boasts a 21.1% net profit margin compared to a sector median of 6.6%.
Morgan Stanley has come out with a ranking of the top 33 stocks it covers in the automobile sector, saying 2022 will be a year of execution.
"Technological re-invention meets obsolescence in a battle of capital and culture... changing the narrative within CSuites and boardrooms around the industry," analyst Adam Jonas and team have forecast for the year ahead for auto.
MS has picked Ferrari as its top car stock saying:
"Ferrari is our new 'Top Pick' (replacing General Motors (NYSE:GM)). Can justify 100% of the company's market cap with the 'fine-art' ICE business… leaving the EV business (currently in skunkworks) for free. This makes RACE our favorite EV stock for 2022."
#5. Porsche
Porsche Automobil Holding SE (OTCPK:POAHY) is a Germany-based holding company whose subsidiaries specialize in the manufacture of cars, SUVs, and sedans. The company owns a majority 53.3% stake in Volkswagen AG (OTCPK:VWAGY).
Last month, Reuters reported that Volkswagen was mulling a Porsche IPO . Sources indicate that the German automaker is still exploring the IPO in order to raise funds for the electrification push by the German automaker.
Estimates on the valuation for Porsche AG range to as high as $101B, making the luxury brand more valuable than Rivian Automotive (NASDAQ:RIVN) and Nio Inc. (NYSE:NIO).
With a current market cap of $31.3B and a PE (TTM) of just under 5x, Porsche is one of the cheapest car stocks out there. POAHY shares have gained 46.5% over the past 52 weeks.
By Alex Kimani for Oilprice.com
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