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 are making efforts to electrify their vehicle line-up. But this is a gigantic undertaking that will require the old and established automotive industry to rethink their operations – and in many ways require them to become computer technology companies.
With so many things changing and cash flows shifting to new auto parts suppliers, there are opportunities for investors to make some money. Patience and time will be required, but three Fool.com employees think Texas Instruments (TXN 1.59%), Volkswagen (VWAGY 0.61%)and NXP semiconductor (NXPI 0.16%) are good buys in the current market sell-off. Here’s why.
1. A more reasonable assessment of a top auto 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 money maker for this company is actually electrical components for industry and the automotive industry.
Texas Instruments (TI) is deeply embedded in the global automotive supply chain. There is a good chance that one of your vehicles uses TI components in the infotainment or lighting system. And as the modern car evolves, TI is a top supplier of powertrain parts for electric vehicles, as well as sensors and parts for advanced driver assistance systems (ADAS). The great thing is that electrical components and chips are expected to grow from around 40% of the cost of making a car to over 50% by 2030.
In other words, one of TI’s top-end markets has a long growth roadmap ahead of it — exactly the kind of trend you’d want from a long-term buy-and-hold stock.
But why this stock now? Following the recent sell-off, shares are trading at 18 times trailing-12-month earnings per share, or 25 times enterprise value, versus trailing-12-month free cash flow. That’s still a peak price, but it’s near the low end of where the stock has traded over the past five years. Free cash flow has been down lately, but that’s because TI is spending right now to support manufacturing expansion in the years to come. Electric vehicles require exponentially more computing and electrical hardware than an internal combustion engine vehicle, so that money should be well spent for TI.
To provide confidence in this investment, TI has a long history of consistency and highly profitable Growth. Free cash flow per share has grown an average of 12% per year since 2004, and the company has paid an increasing dividend every year since. If reliable growth and income are what you’re looking for in an EV stock, Texas Instruments is a fantastic buy right now.
2. Get a 5% yield with a special dividend kicker while playing the EV transition
Billy Duberstein (Volkswagen): Of all the legacy automakers, Volkswagen has perhaps the best chance of competing Tesla and other emerging EV brands. Additionally, the stock looks very cheap right now, at just 5.8 times earnings and a dividend yield of 3.9%. Its preferred stock, ticker VWAPY, is even cheaper, trading at just 4.4 times earnings and a dividend yield of 5.1%.
Investors might not want to look at Volkswagen through the lens of its namesake brand. Rather, the company derives the bulk of its profits from its big luxury brands. Porsche, which makes up the “Sports” 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%. of profits.
The only other pure luxury car brand on the market, Ferrari, trading at 40 times earnings. Porsche and Audi may not quite reach that luxury brand multiple, but I don’t understand why Lamborghini and Bentley couldn’t achieve something similar.
In any case, investors could soon learn what valuation Porsche would receive as a standalone company, as Volkswagen plans to sell around 12.5% of Porsche shares in an initial public offering (IPO) in the near future. Some put Porsche’s value at nearly Volkswagen’s entire valuation, as current estimates range from €60 billion to €85 billion, versus Volkswagen’s €90 billion market cap.
It’s a difficult time to go public given the myriad of concerns in the market and particularly in Europe. But if the IPO eventually goes ahead, management plans to return 49% of the proceeds to shareholders in the form of a special dividend, with the rest going towards Volkswagen’s electric vehicle transition, which is already well underway.
Battery electric vehicles are expected to account for between 7% and 8% of Volkswagen’s total vehicle sales this year, up from 5.1% last year. Meanwhile, the company is also building three different battery factories this year: two in Germany and one in Chattanooga, Tennessee. Meanwhile, the latest Volkswagen ID.4 is poised to hit US markets and will retail for a very reasonable MSRP of $41,000 – significantly lower than the Tesla Model Ys, which come in at around $67,000 start. That’s particularly cheap for an electric vehicle, especially if US consumers can qualify for the new $7,500 tax credit. That could work quite well, especially during lean times marked by inflation and limited consumer spending power.
All in all, Volkswagen is a cheap way to gamble on the EV transition, with a cheap stock, a hefty dividend, and a potential catalyst for Porsche’s IPO on the horizon — and the preferred stock is even cheaper if you don’t care about it voting rights.
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 the barely formed electric vehicle market. At the same time, I own a stock that gives me direct exposure to the entire auto sector, with a strong focus on cutting-edge vehicles like self-driving electric cars. That stock is NXP Semiconductors, which has been a leader in automotive semiconductors for years.
Every vehicle these days is packed with semiconductors. Microchips control the engine, navigation system and in-dash infotainment functions, as well as other visible functions around your car. They also collect data from sensors in the engine and around the car’s body, analyze that data to adjust the vehicle’s performance and make sure your cruise control isn’t causing you to hit the sedan in front of you.
In fact, automotive chips are so critical to the manufacture of new cars that a lack of chip manufacturing capacity has limited the supply of new cars in recent years. But there’s light at the end of the tunnel, and NXP reported a 36% year-over-year increase in automotive chip sales in the second quarter. Consumer demand is high and automakers are accepting slow chip shipments without canceling orders.
As one of the top three chipmakers in this artificially constrained industry, NXP is a great key player for 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 sales and earnings numbers.
At the same time, NXP’s stock price is down more than 30% in 2022 and is trading at a miserable price-to-earnings ratio of 17. The long-term future of this company is nothing short of exciting, and I’m tempted to add a few more shares at these affordable prices.