A Shifting Automotive & Mobility Industry

During 2020 the plantings of exuberance were generated by the electric vehicle, or EV markets, as well as autonomous vehicles, air mobility and other newer technologies.

While many startups, including those derived from special purpose acquisition companies, or SPACs, were being touted as the next major company to replicate Tesla Inc.’s (TSLA) success, an even more dangerous occurrence was underfoot.

Wallstreet was beginning to push the narrative that both Ford Motor Company (F) and General Motors (GM) should see valuation multiple expansion as their pivot to EVs would unlock greater shareholder value.

As the Biden Administration came into office in 2021, the creation and amount of federal government funding programs geared towards EVs also exponentially increased, namely through the Inflation Reduction Act (IRA) and Carbon Pollution Reduction Program (CPRG), among others.

During this time, F was trading as high as nearly $25 per share with GM at nearly $60 per share. Historically, many global automotive OEMs have tended to trade with operating cash flow per share multiples in the low to medium single digits against their stock prices due to the lack of volume growth and sole dependence on pricing power. OEMs focused on higher end markets tend to have a higher multiple versus companies that primarily recognize revenues across lower average per unit prices.

While there are only two major automotive OEMs in F and GM in the U.S., foreign companies have gained substantial market share so unlike the railroad industry where the oligopoly of major companies has led to cash cows and much higher cash flow multiples, F and GM have remained suppressed from this greater global incursion into the U.S.

At the Biden Administration climax, F traded around 5-6 times operating cash flow, and GM traded nearly 6 times. Fast forward to today and multiples have reverted to 2.5 to 3 times operating cash flow, more in-line with traditional multiples. Even worse, nearly 20 percent of companies that are monitored (nearly 80) and mostly including newcomers, have gone bankrupt and/or been acquired prior to declaring bankruptcy.

Essentially Wallstreet’s pump has led to one of the greatest shorting opportunities and now a reset has occurred. My critique of F and GM has predominantly been related to their issue of eating their own lunch and managing both legacy and newer technology business segments. Both companies have witnessed lower cash flow margins as a result while volumes have remained below recent highs, while pricing has begun to wane leading to slower anticipated revenue growth.

As these issues were becoming evermore present, I created a dedicated focus on global automotive OEMs, and other newer technology entrants including autonomous vehicles and advanced air mobility peers, among others. My stance on most of these companies is that the challenges of shifting technologies will continue to place increasing pressures on both legacy and newer entrants. The pace of bankruptcies has continued to illustrate that many SPACs and startups have not instilled any confidence in their abilities to generate enough capital to scale their businesses. At the same time, legacy OEMs have been struggling to balance operating segments, and consolidation has become an increasingly stronger focus, notably through the Honda Motors Corp. (HMC) and Nissan Motor Co. (NSANY) merger announcement.

Like TSLA, I believe that only a select few of today’s leading innovators will be poised to gain the most market share and investment return performance to shareholders including companies like Rivian Automotive, Inc. (RIVN) and BYD Company (BYDDY).

The Zero Emission Vehicle Transition is meant to diligently track and monitor the fundamental trends of the automotive industry with a primary focus on OEMs. The benefits for retail investors are to identify the best investment return opportunities over the long-term, while also identifying companies at risk of bankruptcy.