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Shares of legacy automakers are reeling. Some of this is self-inflicted. Still, bears are making a critical error, and it is a big opportunity for investors.
During the fourth quarter conference call on last week, the chief executive at Ford (F) claimed the company would be the global leader in electric vehicles if its production capabilities were better.
He’s right. Demand for Ford EVs is off the charts. Investors should use the current weakness to accumulate shares.
In fairness, Jim Foley, Ford’s top executive, is trying to have things both ways. Sure, there is plenty of pent up demand for the Mach E, the Mustang-inspired electric SUV. And Lightning, an EV version of the best-selling F-150 pickup, is highly coveted, too. The hiccup is that Ford can’t make enough vehicles to meet demand. It’s a nice problem to have, complicated by a series of unforced errors.
Tesla (TSLA) is the undisputed production leader in EVs. This didn’t happen by chance. The Austin, Tex.-based company has grown by making EVs cool, quick and better than cars and trucks with internal combustion engines. Leaders at the legacy automakers never thought this would happen.
When Tesla started making vehicles in 2008 many auto execs publicly scoffed at the idea, Wiredreported. That changed by 2016 when the Model S, a second-generation luxury sedan began outselling comparable BMWs and Mercedes. Now the Model Y, Tesla’s revamped mid-sized SUV is set to outsell everything.
Tesla’s ascent is due in large part to decline in Detroit, Japan and Germany.
When the pandemic hit in early 2020 legacy automakers started cutting orders for the chips they needed to make vehicles. Execs correctly assumed that lockdowns would crimp demand. What they didn’t foresee was that the chip fabricators would move-on to other customers, pushing the cancelled auto orders to the back of the cue.
Traditional automakers caused the chip shortage, and it may result in industry-wide losses $110 billion, according to a story from Sept. 2021 at CNBC.
In a note to clients on Tuesday, Adam Jonas, an analyst at Morgan Stanley, cut his rating for General Motors (GM) from overweight to equal weight. He also slashed the firm’s price target for the shares based on production worries.
That is the opportunity.
Those losses at legacy automakers, and the slow ramp in EV production due to shortages, are now priced into current stock prices. GM shares are down 27% since the middle of January. Ford stock has sunk 30%.
Farley still says that Ford will increase production for the Mach-E to 200,000 units per year by 2023. Overall EV production by the end of 2023 should reach 600,000 units. If either projection proves remotely accurate, Ford shares are grossly underpriced.
Ford is transitioning from a legacy automaker to an EV company. Shareholders are certain to benefit from all of the new valuation metrics this entails. Production increases, even from small baselines will lead to higher prices. The same is true for new battery agreements, executive hires away from Tesla, and EV model reveals.
Bears are making a critical error by assuming production issues will continue indefinitely. The chip shortage will ease. Ford will begin to fill customer orders for the Mach E and Lightning.
Shares currently trade at 8.9x forward earnings and 0.6x sales. The market capitalization is only $78.4 billion despite huge pent up demand for Ford EVs.
Longer-term investors should consider buying shares into the current weakness, ahead of further announcements on EVs.
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