Estimates and opinions about the electric car market vary widely, but one thing is certain: Sales of battery-powered cars will be trending higher in the next decade. Automakers around the world are scrambling to electrify their car collections. But this is a huge task that requires the old and established auto industry to rethink its operations — and in many ways it requires them to become computing technology companies.
With a lot of things changing and money flows shifting to new auto suppliers, there are opportunities for investors to make some money. It will take patience and time, but three Fool.com contributors think Texas Instruments (TXN 1.59%)And the Volkswagen (VWAGY 0.61%)And the NXP Semiconductor (NXPI 0.16%) They are good buys in light of the current market sell-off. Here’s why.
1. A more reasonable evaluation of a large auto supplier
Nicholas Rossolillo (Texas Instruments): Most people think of their old math class calculator when they hear the name Texas Instruments. But this is really just the tip of the iceberg. The real profit of this company is actually industrial and automotive electrical components.
Texas Instruments (TI) is an integral part of the automotive industry’s global supply chain. There is a good chance that one of your vehicles will use components from TI in the infotainment or lighting system. As the modern vehicle evolves, TI is the number one supplier of drivetrain parts for electric vehicles, as well as advanced driver assistance system (ADAS) sensors and parts. What’s great about this is that electrical components and chips are expected to rise from about 40% of the cost of manufacturing a car today to over 50% by 2030.
In other words, a high-end TI market has a long growth roadmap ahead of it — exactly the kind of direction you want from long-term buy-and-hold stocks.
But why this stock now? After the last sale, the shares are trading 18 times after 12 months profit per share, or 25 times project value To the last 12 months free cash flow. That’s still an excellent price, but it’s close to the low end as the stock has been trading for the past five years. Free cash flow has declined recently, but that’s because TI is spending now to support manufacturing expansion in the coming years. Electric vehicles need significantly more computing and electrical appliances than internal combustion vehicles, so this money should be well spent on TI.
To enhance confidence in this investment, TI has a long history of stability and very profitable growth. The average free cash flow per share has been expanding at 12% annually since 2004, and the company has been paying increasing dividends every year since then. If growth and reliable income is what you’re after in electric vehicle stocks, Texas Instruments is a great buy right now.
2. Get 5% return with a special dividend tool while playing the EV transition
Billy Duberstein (Volkswagen): Of all the vintage automakers, Volkswagen may have the best chance of competing with it Tesla And other start-up electric car brands. On top of that, the stock looks pretty cheap right now, at 5.8 times earnings and a dividend yield of 3.9%. Preferred stocks, under the VWAPY index, are cheaper, trading at just 4.4 times earnings and a 5.1% dividend yield.
Investors may not want to look at Volkswagen in terms of its namesake brand. Instead, the company gets the majority of its profits from its big luxury brands. Porsche, which represents the “sports” segment, took 25% of Volkswagen’s operating profit alone in the first half of 2022, while the “luxury car segment”, which includes Lamborghini, Bentley, Ducati and Audi, took another 39%. of profits.
The only other pure luxury car brand on the market, Ferrari, trading at 40 times profit. Porsche and Audi may not achieve that many luxury brands, but I don’t see why Lamborghini and Bentley couldn’t achieve something similar.
In any case, investors may soon find out what valuation Porsche will have as a stand-alone company, as Volkswagen plans Selling approximately 12.5% of the shares of Porsche In an initial public offering (IPO) soon. Some attach Porsche’s value to the full valuation of VW, given current estimates are between €60 billion and €85 billion, versus VW’s market value of €90 billion.
It’s a tough time to advertise to the public, given the myriad concerns in the market, and Europe specifically. But if the IPO does eventually go through, management plans to distribute 49% of the proceeds to shareholders in a special dividend, with the rest headed toward the Volkswagen EV transition, which is already well underway.
Battery electric vehicles are set to make up between 7% and 8% of all Volkswagen vehicle sales this year, up from 5.1% last year. Meanwhile, the company is also ramping up three different battery plants this year: two in Germany and one in Chattanooga, Tennessee. Meanwhile, the latest Volkswagen ID.4 is about to hit the US market, and it will retail for a very reasonable $41,000—well below the Tesla Model Y’s starting around $67,000. This is especially cheap for electric vehicles, especially if American consumers can qualify for a new $7,500 tax credit. That can be good, especially in lean times affected by inflation and limited purchasing power of consumers.
All in all, Volkswagen is a cheap way to play the EV transition, with cheap stock, huge profits, and a potential catalyst in a Porsche IPO on the horizon — and preferred stock is even cheaper if you don’t care about voting rights.
3. EV Nuts and Bolts: NXP Semiconductor
Anders Billund (NXP Semiconductor): I’ve sold most of my Tesla stock lately, and I’m hardly interested in picking a winner in the electric car market. At the same time, I own one stock that gives me direct access to the entire automotive sector, with a heavy focus on ultra-modern vehicles such as electric cars with self-driving features. That stock is NXP Semiconductors, which has been a leader in automotive-based semiconductors for years.
Every vehicle is filled with semiconductors these days. Microchips control the engine, navigation system, infotainment features inside the dashboard, and other visual features around your vehicle. They also collect data from sensors in the engine and around the car’s body, and analyze that data to fine-tune the car’s performance, making sure your cruise control won’t make you crash into the sedan in front of you.
In fact, auto chips are so essential to manufacturing new cars that a shortage of chip manufacturing capacity has limited the supply of new cars in the past couple of years. But there is light at the end of the tunnel, and NXP has seen auto chip sales Up 36% year over year in the second quarter. Consumer demand is growing and automakers are accepting slow chip deliveries without canceling orders.
as one of the top three chip makers In this artificially constrained industry, NXP is a great game in the automotive sector in general. As electric cars need more chips to control their battery systems and advanced sensor layouts, their growth will also do wonders for the NXP’s top and bottom lines.
At the same time, NXP stock is down more than 30% in 2022 and is trading at a minuscule P/E of 17. The long-term future of this company is very exciting, and I’m very much inclined to add a few more shares at these reasonable prices. .