Certainly, some EV stocks are extremely risky; expensive electric vehicle start-ups are definitely the biggest gamble in the space.
Carrying sky-high valuations and very little revenue, these companies need to somehow obtain fairly large market share to justify their current share prices, let alone increase them. And yet they’re competing against huge firms with gigantic marketing and R&D budgets. Even more alarming is the fact that some of them haven’t received a large number of legitimate orders or cemented potentially lucrative partnerships.
At the other end of the risk spectrum are well-established, profitable companies that look very positioned to benefit from the EV boom. These EV stocks will almost definitely get a large bump from the automotive sector’s electric revolution. But because these companies have other large, profitable businesses, even if their EV ventures underperform, their stocks won’t be tremendous drags on investors’ portfolios.
I recommend that investors with an average level of risk tolerance buy the shares of two or three well-positioned EV start-ups, along with two or three low-risk EV stocks.
Here are four to consider:
- Aptiv (NYSE:APTV)
- Magna (NYSE:MGA)
- Panasonic (OTCMTKS:PCRFY)
- BorgWarner (NYSE:BWA)
EV Stocks: Aptiv (APTV)
Aptiv reportedly can sell double the amount of equipment for EVs as for conventional, internal-combustion-engine (ICE) vehicles.
On July 15, Deutsche Bank increased its price target on APTV stock to $169, citing improved guidance from automakers. Also very bullish is Credit Suisse, which maintained the shares as a top pick on July 1.
Two of Aptiv’s largest customers are also two of the biggest heavyweights in the EV sector: Volkswagen (OTCMKTS:VWAGY) and General Motors (NYSE:GM). Providing further evidence that Aptiv is poised to get a big boost from the EV boom, for the first quarter the company said that the EBITDA of its Signal and Power Solutions unit, which includes its vehicle electrification products, had jumped 43% year-over-year.
What’s more, CFO Joseph Massaro said that in Q1 the company had benefited from “continued strong demand for high voltage electrification solutions in Europe and China.”
Aptiv expects its 2021 cash flow from operations to come in at a very impressive $1.85 billion, a relatively low 23x its current market capitalization.
Magna is the biggest automotive part supplier in North America and is No. 3 worldwide. The company has begun manufacturing EVs for other companies, in addition to selling parts for EVs.
Two companies on which I’ve been bearish – Fisker (NYSE:FSR) and Canoo (NASDAQ:GOEV) – are using Magna’s EV manufacturing services. Still, whatever the fate of those companies, Magna should make a significant amount of money from them. And Magna manufactures Jaguar’s electric SUV, the I-Pace, seen as a competitor of Tesla’s (NASDAQ:TSLA) Model X.
As more small and medium automakers enter the EV space, Magna should recruit many more customers, enabling its EV manufacturing business to thrive.
Moreover, in April, the Korea Times reported that Apple (NASDAQ:AAPL) was close to reaching a deal to have Magna make its EVs.
Despite all of these points, MGA stock is trading at a forward price-earnings ratio, based on analysts’ average 2021 EPS estimate, of slightly over 10x.
EV Stocks: Panasonic (PCRFY)
Panasonic is Tesla’s main supplier of batteries for EVs. Those who are bearish on Panasonic make much of the facts that the conglomerate sells most of its batteries to Tesla and that Panasonic’s battery business hasn’t been profitable.
Yet I believe that, within a year or two, both of those facts are destined to change. With many automakers entering the EV segment and few companies dominating the battery business, the laws of supply and demand will be on Panasonic’s side. Compounding that situation, many large governments are starting to require that EVs constitute a large percentages of vehicles sold within their borders.
Also noteworthy is that Panasonic has already launched a joint venture with the world’s largest automaker, Toyota (NYSE:TM). The JV will develop batteries for Toyota and other companies. Given Toyota’s huge size, ample funds, and big EV plans, along with the rapid growth of the Chinese and European EV markets, the JV should be meaningfully profitable for Panasonic.
In 2019, Panasonic launched an initiative designed to increase its profits. The effort seems to be paying off, as the company’s operating income increased to $912.6 in its quarter that ended in December 2019 versus $862.4 during the same period a year earlier. Additionally, its OI jumped to nearly $1.3 billion for the quarter that ended in December 2020, way up from $912.6 million during the same period a year earlier. In Panasonic’s last reported quarter, its OI climbed to $312.8 million, versus $291 million.
In March, BorgWarner launched a strategy that it anticipates will grow its EV sales “from less than 3% of total revenues to about 45% by 2030.
In June, Baird analyst Luke Junk contended that BWA stock was “on sale.” He had a $59 price target on the shares, versus the stock’s closing price current price of $47.
Also encouragingly, last month, BorgWarner announced that the huge Korean automaker Hyundai (OTCMTKS:HYMTF) would use BorgWarner’s integrated drive module for its “A-segment” EVs. Hyundai is slated to begin producing those vehicles in mid-2023.
The Hyundai deal, along with the growth of BorgWarner’s EV unit, validates the attractiveness of its EV technology.
The forward P/E ratio of BWA stock is a fairly tiny 11.4, even though the company’s EBIT was slightly over $1 billion last year, despite the coronavirus crisis.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.
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