Automotive Monthly Newsletter &
Podcast:
What do capital markets tell us about the automotive
industry?
Although financial markets grab headlines when fear
and volatility are highest, the same markets do also function
rationally, and are a window into an ongoing re-evaluation of
companies’ prospects and risks. So, what can we learn from the
state of the markets today?
The autos sector contains some of the cheapest and the most
expensive companies in the world. This simultaneously reflects both
the inherent challenges of legacy carmaking, and the markets’ hopes
for the future beneficiaries of change. In recent months automotive
start ups have faced a stark valuation reality check, and the
virtual closure of the SPAC funding route reflects far greater
scrutiny from investors. Further capital displacements are likely
in the coming years as a lumpy technological transition plays out
all along the supply chain. None of this has fundamentally changed
the broad long-term outlook for electrification. Meanwhile near
term, there is plenty of turbulence – notably from currency,
largely to the detriment of US automakers.
Autos is the most polarised sector
The automaking sector is in the unusual position of containing
both some of the cheapest – and some of the most expensive listed
companies in the world. On one side legacy established automakers –
like VW trades at around 4.5 times its expected 2022 earnings. At
the other end tech-focused electric vehicle makers notably Tesla
for which this figure is 52 times, (vs. for comparison Alphabet
18x, Apple 22x, and Amazon 61x) – plus various as yet-unprofitable
start-ups for which no such calculation is yet possible.
Legacy autos’ valuations reflect inherent
challenges
Automakers like VW have traded inexpensively relative to their
earnings for many years. There are many reasons why: Sector
profitability is low compared to its capital requirements. Balance
sheet risk is high due to inventory requirements and the need to
pay (and also effectively underwrite) the risks of component
suppliers and dealer networks. This in turn means bankruptcy risk
in economic downturns is significant. The new cohort of start-ups
promises to address many of these: Lower mechanical complexity
means lesser capital requirements, and simpler supply chains. Less
maintenance means few or no traditional dealers and lower
inventories. For this group, being electric-only is the
enabler.
Relative growth expectations underpin the valuation
gap
However, the clearest justification for the valuation gap is the
growth differential. This year-to-date, global battery electric
vehicle sales grew 68% vs. prior year, while total light vehicles
contracted by 13%. Legacy automakers access to that growth is
limited since even BEV transition leaders like BMW and VW have
around 6% BEV in their sales mix. Ultimately, legacy automakers are
fighting to defend a $2.5tn market, while new automakers aspire to
capture it – with little to lose.
Investor appetite for ‘New autos’ has waned
dramatically
New automakers’ valuations have undergone stark adjustments in
the past year. The chart below lists a selection of electric
carmakers and their current market values relative to their
respective peak levels. These moves are partly macro-driven:
Economic conditions have become more difficult globally, with
growth slowing, inflation up, and appetite for risky assets in
general significantly down. However, the key shift is perhaps
growing recognition of the difficulties inherent in starting and
scaling automotive production from scratch.
Preferred funding route now closed
At the same time, the popularity of fundraising via the SPAC
(special purpose acquisition company) route has ground to a virtual
halt, with 69 such transactions in 2022 to date versus 613 during
2021. EV companies that went public via the speculative ‘blank
cheque’ method in 2021 included Fisker, Polestar, Lucid, and
Arrival. Companies now wishing to follow in their footsteps are
likely to significantly greater financial scrutiny.
A bumpy transition
Early market euphoria has not given way to the reality of the
task in front of us. Undoubtedly the growth of BEVs and the
commensurate decline in ICEs (Internal Combustion Engine) will be
the industry’s most critical transition since its inception early
last century – this will certainly not be smooth. A transformation
which significantly impacts all facets of the mobility ecosystem –
innovation, vehicle development, system sourcing, production
dynamics, retail engagement and the aftermarket – will be “bumpy”.
This will be uncharted territory at virtually every level.
Transition speed, commitment by stakeholders (consumers,
government, dealers etc.), securing upstream battery raw materials,
altered logistic streams, consumer acceptance/education and an
all-new service dynamic all cloud the sky. The current ICE-focused
ecosystem took us over a century to hone – expecting a
transformation with little drama through the next decade is not
realistic.
Capital displacement is likely across the
ecosystem
The prospect for capital displacement is high at all levels of
the ecosystem. Case in point are the component suppliers. Critical
to future innovation, re-investment and most of the current vehicle
value add, several suppliers in system areas which disappear in the
BEV world are faced with key decisions. The options are to stand
pat and ride the volume decline, pivot, and focus efforts on
systems key to the BEV space, double-down and be a consolidator in
a declining market, or simply sell the operation. Timeframes will
vary though the displacement is undeniable. There will most
certainly be winners and losers during the transition.
Electrification has not been derailed
Despite the ensuing ecosystems shifts, does this mean
electrification now won’t happen, or will happen slower? There is
limited evidence of large changes to the fundamental outlook. For
one, the post-Ukraine surge in battery raw material prices has
abated somewhat, while still-elevated gasoline prices provide
support to BEV ownership costs on a relative basis. Furthermore,
regulatory momentum continues to work in favour of electrification,
with the EU parliament notably voting in early June to ban new
internal combustion sales from 2035, albeit still subject to
agreement from prominent opponents such as Germany.
The shifting sands of currency
Finally, a note on currency movements. Global automakers’
fortunes are to some extent a function of central banks’
potentially divergent approaches to tackling inflation in the
coming years. Specifically, a strong US dollar is creating
headaches for US domestic carmakers, and a boost to those
elsewhere. The dollar’s 19 year high vs. other currencies (USDX
index) hurts GM and Ford because their income from overseas
operations is brought home at a less favourable exchange rate.
Conversely, a strong dollar is good news for automakers outside the
United States, whose overseas profits are boosted by currency
effects. Whether investing outside the United States makes sense
depends on one’s perspective: A US investor in Nissan would have
seen its shares fall only 10% but would have lost another 15% from
the weakening yen.
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Ask the
Expert: Demian Flowers, Automotive Financial Analyst
Ask the Expert: Michael Robinet,
Executive Director, Automotive Consulting Services
This article was published by S&P Global Mobility and not by S&P Global Ratings, which is a separately managed division of S&P Global.
