Tesla (TSLA) is the world’s most valuable automaker with an $800 billion market capitalization. While the company has been a pioneer in EVs and has built a cult following, it’s also overvalued by many traditional valuation metrics.
For example, it has a price-to-sales ratio (P/S) of 28.4, while legacy automakers’ P/S are under 1. Another staggering statistic is that the cumulative market cap of all automakers across the world is $2.24 trillion which means TSLA accounts for 1/3 of it. However, in 2020, TSLA produced 0.6% of the 80 million vehicles produced globally.
TSLA’s ascent has been fueled by investors becoming increasingly optimistic about the potential for EVs, and its dominant position within this expanding market. However, the legacy automakers are also going to compete for market share.
Every trend must end. I believe that rising interest rates could be the catalyst that results in legacy automakers outperforming, while Tesla’s stock takes a much-needed breather. Even for long-term bulls, this would be a healthy development to reset sentiment and improve valuation.
Expect Strong Auto Sales in 2021
Earlier this month, it was reported that Apple (AAPL) was going to build its own electric car. This is a big deal for many reasons. For one, it validates investors’ optimism about the potential of the sector. After all, Apple would only be willing to spend billions on this endeavor if it felt the opportunity was worth it.
However, this increased competition from companies with deep pockets and scrappy startups, like Fisker (FSR), pose a threat to Tesla, as it means more competition and will potentially put pressure on margins.
Another threat is that legacy carmakers are starting to introduce their own EVs and are getting rave reviews for design and performance and starting to gain traction. Already, in many European countries, Volkswagen’s EVs are outselling Tesla’s.
Another reason to like legacy carmakers is that auto sales are going to be very strong in 2021. Many put off purchases due to the pandemic, so there will be pent-up demand. Additionally, the economy is expected to be quite strong, especially in the second half of the year, as the economies reopen with people getting vaccinated. Finally, due to decelerating global growth since 2018, global auto sales have lagged, so there will be an even larger bounceback effect.
Given these factors, investors should look to buy legacy automakers. These stocks are likely to experience multiple expansion and earnings growth which are fuel for outperformance. In contrast, high-multiple stocks like Tesla are riskier than normal with rising interest rates. Among the legacy automakers, three to consider are Ford (F), General Motors (GM), and Tata Motors (TTM).
It’s interesting to compare Ford and TSLA. TSLA has a forward price to earnings ratio of 211, while Ford’s is 9.8. In 2021, Tesla expects to produce 800,000 cars, contingent on the successful expansion of facilities in China and Germany. Ford forecasts production of 2.6 million vehicles.
Since November, the market environment has changed to favor value stocks over growth stocks. The primary factor is rising interest rates which tend to be favorable for value stocks while punishing stocks with high multiples. Additionally, value stocks have underperformed growth stocks for more than a decade. Historically, this relationship has been mean-reverting.
Although 2020 is less than three weeks old, Ford is up 25%. Investors are becoming optimistic about the company’s prospects to compete in EVs due to early, positive reviews for the electric F-150 and Mustang. This development could give Ford growth upside in addition to its strong value factors.
The POWR Ratings are bullish on F as it has a Strong Buy rating. It has an “A” for Trade Grade, Buy & Hold Grade, and Industry Rank with a “B” in Peer Grade. Among Auto & Vehicle Manufacturers, it’s ranked #7 out of 52.
General Motors (GM)
GM’s stock is up 287% from its March 2020 lows. At first, the stock sunk amid concerns about production issues and lower demand due to the coronavirus. GM began to gradually rally along with the broader market, although it underperformed, during the first few months of the rally.
However, in recent months, the stock has begun to outperform as sales rebounded resulting in a better than expected profit in Q3. Additionally, analysts are becoming increasingly optimistic about next year’s outlook due to the combination of fiscal stimulus and coronavirus vaccine. Some more catalysts for the stock are its announcement of upcoming EV vehicles and partnership with Microsoft (MSFT) to develop a self-driving car.
GM is rated a Strong Buy by the POWR Ratings. It has an “A” across all categories including Trade Grade, Buy & Hold Grade, Peer Grade, and Industry Rank. Among Auto & Vehicle Manufacturers, it’s ranked #4 out of 54.
Note that GM is one of the few stocks handpicked currently in the Reitmeister Total Return portfolio. Learn more here.
Tata Motors (TTM)
Like a lot of international stocks, TTM has performed quite well over the past couple of months as the dollar has weakened. Since early November, the stock is up 94%, and it’s up 347% from the March 2020 lows.
The stock is already above its pre-coronavirus highs by a significant margin as investors are increasingly optimistic about the company’s outlook for 2021 and 2022. TTM continues to enter new markets, where it’s been able to gain market share. Additionally, analysts are forecasting a strong rebound in auto sales in India as well. Even before the pandemic, auto sales in India were in a secular uptrend.
Despite this growth potential, the stock is quite attractively priced with a forward price to earnings ratio of 9. Historically, its multiple has fluctuated around 20. This means TTM could be in the sweet-spot of multiple expansion and earnings growth which often correlates to significant gains in stocks.
These positive fundamentals are reflected in TTM’s POWR Ratings as it’s rated a Strong Buy. It has an “A” across all categories including Trade Grade, Buy & Hold Grade, Peer Grade, and Industry Rank. Among Auto & Vehicle Manufacturers, it’s ranked #9 out of 41.
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TSLA shares were trading at $850.45 per share on Wednesday afternoon, up $5.90 (+0.70%). Year-to-date, TSLA has gained 20.52%, versus a 2.68% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. As a reporter, he covered the bond market, earnings, and economic data, publishing multiple times a day to readers all over the world. Learn more about Jaimini’s background, along with links to his most recent articles. More...
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