Estimates and opinions on the electric vehicle (EV) market vary widely, but one thing is certain: sales of battery-powered cars will increase over the next decade. Automakers around the world are scrambling to electrify their vehicle lines. But it’s a massive undertaking that’s forcing the old, well-established auto industry to rethink its operations — and in many ways, forcing them to become computer technology companies.
With so much changing and money flows moving to new automotive suppliers, there are opportunities for investors to make money. It will take patience and time, but three Fool.com contributors think Texas Instruments (TXN 1.59%), volkswagen (VWAGY 0.61%)and NXP Semiconductors (NXPI 0.16%) are good buys in the current market liquidation period. Here’s why.
1. A more reasonable valuation on a leading automotive supplier
Nicholas Rossolillo (Texas Instruments): Most people think of their old math class calculator when they hear the name Texas Instruments. But that’s really just the tip of the iceberg. The real bread and butter of this company is actually industrial and automotive electrical components.
Texas Instruments (TI) is deeply embedded in the automotive industry’s global supply chain. Chances are one of your vehicles uses TI components in the infotainment or lighting system. And as the modern car evolves, TI is a leading supplier of electric vehicle drivetrain parts, as well as Advanced Driver Assistance System (ADAS) sensors and parts. What’s so great about this is that electrical components and chips are expected to grow from around 40% of the cost of manufacturing a car today to over 50% by 2030.
In other words, one of TI’s high-end markets has a long growth roadmap ahead of it – exactly the kind of trend you’d expect from a long-term stock.
But why this stock now? After the recent sell-off, shares are trading at 18 times trailing 12-month earnings per share, or 25 times enterprise value to trailing 12-month free cash flow. This is still a high price, but it is near the bottom of the range where the stock has traded for the past five years. Free cash flow has been falling lately, but that’s because TI is currently spending to support manufacturing expansion in the coming years. Electric vehicles require exponentially more hardware and electrical equipment than an internal combustion vehicle, so it should be money well spent for TI.
To build confidence in this investment, TI has a long history of and very profitable growth. Free cash flow per share has grown an average of 12% per year since 2004, and the company has distributed an increasing dividend every year since then. If reliable growth and revenue are what you’re looking for in an EV stock, Texas Instruments is a fantastic buy right now.
2. Get a 5% return with a special dividend kicker while playing the EV transition
Billy Duberstein (Volkswagen): Of all the traditional automakers, Volkswagen has perhaps the best chance to compete with You’re here and other upstart electric vehicle brands. Additionally, the stock looks very cheap at the moment, at just 5.8 times earnings and a dividend yield of 3.9%. Preferred shares, under the symbol VWAPY, are even cheaper, trading at just 4.4 times earnings and a dividend yield of 5.1%.
Investors might not want to view Volkswagen through the lens of its namesake brand. On the contrary, the company derives the majority of its profits from its major luxury brands. Porsche, which represents the “sports” segment, alone accounted for 25% of Volkswagen’s operating profit in the first half of 2022, while the “luxury segment”, which includes Lamborghini, Bentley, Ducati and Audi, accounted for 39% additional. of profits.
The only other pure luxury car brand on the market, Ferrari, trades at 40 times earnings. Porsche and Audi might not quite hit that luxury brand multiple, but I don’t see why Lamborghini and Bentley couldn’t hit something similar.
Either way, investors may soon find out what valuation Porsche would get as a stand-alone company, as Volkswagen plans to sell around 12.5% of Porsche shares in an initial public offering (IPO) very soon. Some pin Porsche’s value to almost the entire Volkswagen valuation, given that current estimates are between 60 billion and 85 billion euros, compared to a market capitalization of 90 billion euros for Volkswagen.
It’s a difficult time to go public, given the myriad concerns in the market, and in Europe in particular. But if the IPO goes through, management plans to distribute 49% of the proceeds to shareholders as a special dividend, with the rest going to Volkswagen’s EV transition, which is already well underway.
Battery electric vehicles are expected to account for between 7 and 8 percent of Volkswagen’s total vehicle sales this year, up from 5.1 percent last year. Meanwhile, the company is also ramping up three different battery factories this year: two in Germany and one in Chattanooga, Tennessee. Meanwhile, the latest Volkswagen ID.4 is about to hit US markets and will cost a very reasonable starting MSRP of $41,000, significantly lower than the Tesla Model Y starting at around $67,000. $. That’s especially cheap for an electric vehicle, especially if US consumers can take advantage of the new $7,500 tax credit. This could very well happen, especially in lean times impacted by inflation and limited consumer purchasing power.
Overall, Volkswagen is a cheap way to play the EV transition, with cheap stock, a big dividend and a potential catalyst in Porsche’s IPO on the horizon – and preferred stocks are even less expensive if you don’t care. on the right to vote.
3. EV Bolts and Nuts: NXP Semiconductors
Anders Bylund (NXP Semiconductors): I’ve sold most of my Tesla stock recently, and I’m not interested in picking a winner in the newly born EV market. At the same time, I own a stock that gives me direct access to the entire automotive industry, with a particular focus on state-of-the-art vehicles such as self-driving electric cars. That stock is NXP Semiconductors, which has been a leader in automotive semiconductors for years.
Every vehicle is stuffed with semiconductors these days. Microchips control the engine, navigation system, and in-dash infotainment features, as well as other features seen around your car. They also collect data from sensors in the engine and around the body of the car, analyze that data to adjust vehicle performance, and ensure that your cruise control won’t crash into the sedan in front of you.
In fact, automotive chips are so crucial to making new cars that a shortage of chipmaking capacity has limited the supply of new cars for the past two years. But there is light at the end of the tunnel, and NXP saw automotive chip sales rise 36% year-over-year in the second quarter. Consumer demand is high and automakers are accepting slow chip deliveries without canceling orders.
As one of the top three chipmakers in this artificially constrained industry, NXP is a great set of nuts and bolts on the automotive sector in general. As EVs need even more chips to control their battery systems and advanced sensor layouts, their growth will also do wonders for NXP’s bottom line.
At the same time, NXP’s share price has fallen more than 30% in 2022 and is trading at a miserly price-earnings ratio of 17. The long-term future of this company is downright exciting, and I am strongly tempted to add a few more actions at these affordable prices.
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