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Four stocks to plug into the electric vehicle revolution

Old-guard car manufacturers have joined Tesla, and more arrivals are around the corner.

Vikram Barhat 26 October, 2016 | 5:00PM
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Transportation accounted for 26% of total greenhouse gas emissions in 2014 in the United States, making it the second largest contributor after electricity (30%), according to the most recent U.S. Environmental Protection Agency (EPA) report.

Given that nearly 95% of the world's transportation energy comes from gasoline and diesel, it's not surprising that the EPA and the National Highway Traffic Safety Administration (NHTSA) in the U.S. are pushing for emission and fuel efficiency rules projected to save consumers US$1.7 trillion in gas.

This has ushered the global automotive industry into a disruptive new era. Leading manufacturers are now rushing to capture the largest slice of the low-emission electric vehicles (EV) market, which Goldman Sachs expects to grow from about 1 million cars in 2015 to more than 25 million in 2025 when it will have become a US$244 billion industry. By 2025, electric vehicles -- hybrid and pure electric cars combined -- will represent 22% of all light vehicles worldwide, says the Goldman Sachs report. Projections like these have prompted some industry experts to suggest this could be the inflection point for the EV market before growth explodes.

Although Tesla is leading the charge for widespread use of plug-in vehicles, old-guard manufacturers have joined the fray with a flurry of EVs, and more arrivals are around the corner. For investors looking to play the EV revolution, this may be a good time to start paying close attention to, and perhaps investing in, select names in the market.

Nissan Motor Co. Ltd. ADR
Ticker NSANY
Current yield 3.77%
Forward P/E 6.9
Price $19.64
Fair value -
Data as of Oct. 24, 2016

Japanese automobile giant  Nissan (NSANY) sells about 3 million vehicles annually. Its partnership with French automaker Renault -- where Renault owns 43.4% of Nissan while Nissan owns 15% of Renault -- places the combined group in the top five of all automakers in the world with 6 million vehicles sold annually. Nissan's financial services subsidiary provides consumers with auto loans and leases.

The combined Nissan-Renault group has manufactured 340,000 electric cars since 2010 when it launched its first electric car, the Nissan Leaf. "Nissan is the prime mover in all-electric powertrain vehicle technology for the mass markets, enjoying a temporary competitive advantage as early adopters are willing to pay a premium to be the first to possess the new technology," says a Morningstar report.

The first automaker to offer fully electric vehicles to the mass market, Nissan has been expanding to faster-growing emerging markets, where the number of new cars sold is projected by Goldman Sachs to reach 68 million by 2020, twice as many as in the developed world.

"Emerging markets offer tremendous growth potential for automakers, with entry-level vehicle segments constituting 25% of global auto production," says Morningstar equity analyst Richard Hilgert, who forecasts a 3% annualized revenue growth rate over the next five years and 6% average operating margin "owing to recovery in China, Europe and Japan, as well as reasonably healthy demand in the U.S."

The stock is currently trading at a 25% discount to Hilgert's US$26 fair value estimate, offering "a compelling value for investors."

Tesla Motors Inc.
Ticker TSLA
Current yield -
Forward P/E 104.5
Price $202.76
Fair value $259
Data as of Oct. 24, 2016

The current market leader and a staunch proponent of the EV technology,  Tesla Motors (TSLA) galvanized the world's transition to electric mobility by releasing a full range of increasingly affordable electric vehicles. It also offers batteries for stationary energy storage for residential and commercial properties.

The company said its third-quarter production rose 37% from the second quarter to 25,185 vehicles, more than doubling from a year ago, and was aiming to roll out another 50,000 vehicles in the second half of 2016. The electric-car maker has a 2018 sales target of 500,000 for its yet-to-be-launched US$35,000 Model 3 sedan.

Although Tesla is some way away from mass production, it is building a battery factory, named Gigafactory, in Nevada to facilitate large-scale manufacturing of cars. Earlier this year, CEO Elon Musk made public his intentions to make 1 million cars in 2020. Morningstar strategist David Whiston says "that will certainly not all be in California," hinting at the possibility of geographic expiation of manufacturing to bring cost efficiencies.

Morningstar projects 79,000 vehicle deliveries for 2016, 180,000 for 2017, and 400,000 for 2018, with a total of 6.9 million new vehicle deliveries over 10 years. Its energy-storage segment is forecasted to generate revenue of US$510 million in 2016, clocking US$6 billion by 2025. This revenue represents about 10% of the stock's fair value, which Whiston appraised at US$259, more than 25% above its current price, as of Oct. 18.

General Motors Co.
Ticker GM
Current yield 4.55%
Forward P/E 5.6
Price $32.98
Fair value $48
Data as of Oct. 24, 2016

The largest U.S. automaker with a market share of just under 18% in 2015,  General Motors (GM) produces vehicles in 30 countries and sells popular brands such as Chevrolet, GMC, Buick and Cadillac. It sold nearly 10 million vehicles around the world in 2015, with China and the U.S. each representing a third of its global sales.

The Detroit-based car maker is set to assert itself in the EV market with Chevrolet Bolt, which is expected to shake things up in the battery-powered car market when it launches later this year. Pitched as an affordable electric car that can travel 238 miles (383 km) on a single charge -- the longest range claimed by any automaker yet -- the Bolt hits the road a year before Tesla's similarly priced Model 3, which could help GM gain an early-mover advantage.

A massive, multi-year restructuring has helped boost GM's earnings potential, says Whiston, noting that the firm "finally has a healthy North American unit and can focus its U.S. marketing efforts on just four brands instead of eight." Benefit concessions and plant closings, on the other hand, have drastically lowered GM North America's break-even point.

"GM no longer has to overproduce in an attempt to cover high labour costs and then dump cars into rental fleets," adds Whiston, who pegged the stock's fair value at US$48.

Volkswagen AG ADR
Ticker VLKAY
Current yield 0.09%
Forward P/E 8.3
Price $29.35
Fair value $42
Data as of Oct. 24, 2016

German automaker  Volkswagen (VLKPY) sells passenger cars under the Volkswagen brand, and has an enviable portfolio of premium brands including Audi, Bentley, Bugatti, Lamborghini and Porsche. The company also makes commercial vehicles.

Undeterred by the Dieselgate scandal, Volkswagen is successfully executing a global automotive strategy. "Geographically diverse and profitable operations reduce the company's dependence on domestic volume," says a Morningstar report. "A broad array of brands, serving multiple segments, reduces reliance on any one vehicle category."

Uncertainty regarding the diesel debacle may plague Volkswagen for some time, and create short-term stock price fluctuations, but the automaker has the ability to bounce back from it. "With an enviable portfolio of brands, a bevy of new and redesigned model introductions, and leading shares in many of the world's markets, as well as a healthy pile of cash, we think Volkswagen is well buffered to endure potentially substantial fines and judgements," says Hilgert.

Volkswagen enjoys premium pricing in many markets and is pushing to increase its current 3.2% share of the U.S. market by rolling out new vehicles as it tries to claw back lost credibility and consumer confidence.

Hilgert's US$42 fair value estimate for Volkswagen's American Depositary Receipt (ADR) is well above its current price. Hilgert asserts that long-term investors should be prepared to handle some volatility, though, "as the company works through lawsuit settlements, government fines and vehicle fixes."

Complete access to Morningstar's research on equities, mutual funds and exchange-traded funds is available to subscribers to Morningstar Canada Premium.

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About Author

Vikram Barhat

Vikram Barhat  Vikram Barhat is a Toronto-based financial writer specializing in investing, stock markets, personal finance and other areas of the financial services industry. He also writes for CNBC, BBC, The Globe and Mail, and Toronto Star.

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