Estimates and opinions on the electric vehicle (EV) market vary widely, but one thing is certain: sales of battery-powered cars will increase in the coming decade. Automakers around the world scramble to electrify their vehicle lineups. But it’s a massive undertaking that requires the old and well-established automotive industry to rethink their operations — and in many ways, they need 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. Patience and time will be needed, but three Fool.com contributors think Texas Instruments (TXN) 1.59%,, Volkswagen (VWAGY 0.61%,And NXP Semiconductors (nxpi 0.16%, Selling in the current market is a good buy. Why over here
1. More Reasonable Appraisals at a Top Auto Supplier
Nicolas Rosolillo (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 moneylenders for this company are actually industrial and automotive electrical components.
Texas Instruments (TI) is deeply embedded in the global auto industry supply chain. There is a good chance that one of your vehicles uses components from TI in the infotainment or lighting system. And as the modern car develops, TI is a top supplier of drivetrain parts for EVs, as well as advanced driver assistance system (ADAS) sensors and parts. The great thing about this is that the electrical components and chips are expected to go from about 40% of the cost to build a car today to upwards of 50% by 2030.
In other words, TI has a long roadmap of growth ahead of one of the top markets — exactly the kind of trend you’d want from a long-term buy-and-hold stock.
But why this stock now? After the recent sell-off, the shares trade for 12-month free cash flow behind 12-month earnings per share, at 18 times, or 25 times behind enterprise value. That’s still a premium price tag, but it’s close to the low end the stock has traded over the past five years. Free cash flow has fallen as of late, but that’s because TI is spending now to support manufacturing expansion in the coming years. EVs require exponentially more computing and electrical hardware than an internal combustion vehicle, so it should be money well spent for TI.
To increase confidence in this investment, TI has a long history of stable and highly profitable growth. Free cash flow per share has expanded by an average of 12%-annually since 2004, and since then the company has removed a growing dividend each year. If reliable growth and earnings are what you’re after EV stock, Texas Instruments is a great buy right now.
2. Receive a 5% yield with a special dividend kicker when playing EV Transition
billy duberstein (Volkswagen): Of all the older automakers, Volkswagen may have the best shot at competing Tesla and other upstart EV brands. Plus, the stock looks pretty cheap at the moment at just 5.8 times earnings and a 3.9% dividend yield. Preferred shares are even cheaper under the ticker VWAPY, trading at just 4.4 times earnings and a 5.1% dividend yield.
Investors may not want to see Volkswagen through the prism of its namesake brand. Rather, the company gets a major part of its profits from its big luxury brands. Porsche, which accounts for the “Sport” segment, accounted for 25% of Volkswagen’s operating profit in the first half of 2022 alone, while the “luxury segment”, which includes Lamborghini, Bentley, Ducati and Audi, accounted for another 39%. is responsible for. Why profit?
The only other pure luxury car brand in the market, ferrari, trades at 40 times the income. Porsche and Audi may not have achieved that luxury brand multiple, but I don’t know why Lamborghini and Bentley couldn’t achieve something similar.
In any case, investors may soon find out what valuation Porsche would receive as a stand-alone company, as Volkswagen plans to sell about 12.5% of Porsche shares in an initial public offering (IPO) soon. is of. Some pin the value of Porsche on Volkswagen’s near-perfect valuation, noting that current estimates are between 60 billion and 85 billion euros, compared to Volkswagen’s 90 billion euro market cap.
Given the myriad concerns in the market, and especially in Europe, this is a difficult time to go public. But if the IPO eventually goes through, management plans to distribute 49% of the proceeds to shareholders in a special dividend, with the rest going toward Volkswagen’s EV transition, which is already well underway. Used to be.
Battery-powered electric vehicles are set to make up between 7% and 8% of Volkswagen’s total vehicle sales this year, up from 5.1% last year. Meanwhile, the company is also launching three different battery plants this year: two in Germany and one in Chattanooga, Tennessee. In the meantime, the latest Volkswagen ID.4 is due to arrive in US markets, and will retail for a very reasonable starting MSRP of $41,000 – significantly less than the Tesla Model Ys starting at around $67,000. That’s especially cheap for an EV, especially if American consumers can qualify for the new $7,500 tax credit. It could do quite well, especially in the short run affected by inflation and limited consumer spending power.
Overall, the Volkswagen EV is a cheap way to play the transition, with a cheap stock, a hefty dividend, and a potential catalyst in a Porsche IPO on the horizon — and preferred shares are even cheaper if you don’t care about voting rights. about.
3. EV Nuts and Bolts: NXP Semiconductors
Anders Bylund (NXP Semiconductors): I recently sold most of my Tesla stock, and I’m not interested in picking a winner in a barely-born market for electric vehicles. Plus, I own a stock that gives me direct access to the entire auto sector, with a heavy emphasis on ultra-modern vehicles such as electric cars with self-driving features. That stock is NXP Semiconductors, which has been a leader in car-based semiconductors for years.
Every vehicle these days is loaded with semiconductors. Microchips control your car’s engine, navigation system and in-dash infotainment features and other visible features. They also collect data from sensors in the engine and around the car’s body, analyze that data to adjust vehicle performance, and make sure your cruise control won’t hit the sedan in front of you.
In fact, automotive chips are so important to the manufacture of new cars that a lack of chipmaking capability has limited the supply of new cars over the years. But there’s light at the end of the tunnel, and NXP saw automotive chip sales increase 36% year over year in the second quarter. Consumer demand is driving high and automakers are accepting slow chip deliveries without canceling orders.
As one of the three largest chip makers in this artificially constrained industry, NXP is having a great nuts-and-bolts game on the auto sector in general. As electric vehicles require even more chips to control their battery systems and advanced sensor layouts, their growth will also do wonders for NXP’s top and bottom lines.
At the same time, NXP’s share price has fallen more than 30% in 2022 and trades at a poor price-to-earnings ratio of 17. The long-term future of this company is downright exciting, and I’m very tempted to add something. More shares at these cheaper prices.