Tesla’s valuation is a problem JPMorgan says
Tesla reported 241,300 deliveries for the third quarter on Saturday. According to Street Account, this was significantly higher than the 220,900 expected by analysts. On Monday, the stock was rising in premarket trading.
“The better 3Q deliveries distinguish Tesla from other automakers, which have struggled to secure a sufficient supply of semiconductors, implying solid company-specific execution in this area as well as strong underlying demand,” according to the note.
The auto industry has been one of the sectors most affected by global supply chain issues during the pandemic, as factory closures in the United States last year were followed by a worldwide semiconductor shortage, which slowed production.
That new target, however, is still more than 70% lower than where Tesla closed on Friday.
“While our new higher price target continues to imply material potential downside, we do not believe it is ungenerous, especially given that it values Tesla as the world’s second largest automaker by market capitalization (behind Toyota and ahead of Volkswagen), which is only one notch down from its current (admittedly by far) #1 position despite ranking as the 18th largest automaker by unit volume.
Tesla has struggled in 2021 after being one of the best performing stocks in 2020. The stock has gained slightly less than 10% year to date, trailing the broader market, but it has gained traction in recent months.
Jose Asumendi, JPMorgan’s head of European autos equity research, said on Wednesday that his two favorite electric vehicle stocks in Europe are Daimler and Stellantis (formerly Fiat Chrysler).
“I have a lot of respect for Volkswagen… But, right now, my top picks are Stellantis and Daimler,” Asumendi said.
Daimler owns Mercedes-Benz, while Stellantis, based in the Netherlands, owns Fiat, Jeep, Maserati, Vauxhall, Citroen, Dodge, and Peugeot.
“Stellantis is one of the electrification leaders in Europe,” Asumendi said, adding that the company has a similar electric vehicle market share in Europe’s mass manufacturing segment to Volkswagen.
“What I like about Stellantis’ strategy is that it includes not only product launches but also a battery strategy,” he said.
Stellantis recently established ACC to build batteries in Europe and the United States, and Asumendi stated that the company, which is also backed by Daimler, intends to significantly expand its operations in the coming years.
Stellantis, along with Volkswagen, Toyota, and General Motors, is “resurfacing as one of the world’s largest car makers,” he claims.
“We thought all these brands [owned by Stellantis] were going to die and go bankrupt at some point, but it turned out to be different,” Asumendi said, citing how CEO Carlos Tavares successfully restructured brands such as Peugeot and Citroen.
“He is now planning to do the same with Alfa Romeo, Maserati, and Fiat. As a result, Stellantis provides a genuine opportunity to invest in this European restructuring equity story.”
Daimler has reduced the fixed cost base of Mercedes-Benz vehicles by approximately 20%, according to Asumendi, who praised the efforts of CEO Ola Kallenius and CFO Manish Thakore.
“You will have two clearly run companies under the same hat: Mercedes-Benz Cars and Mercedes-Benz Trucks,” he said, adding that it will provide more clarity and transparency.
Asumendi “thinks very highly” of the new Mercedes-Benz EQS electric vehicle, and he emphasized the company’s efforts to electrify commercial vehicles and trucks.
Stellantis has a price target of 27 euros, while Daimler has a price target of 98 euros. On Friday, the companies’ shares were trading at around 16.5 euros and 77 euros, respectively.
Lucid Elsewhere, on September 15, Bank of America upgraded US EV maker Lucid to a buy rating. In 2018, the California-based company received $1 billion in funding from Saudi Arabia’s Public Investment Fund.
“Our Buy rating is based on our belief that LCID is one of the most legitimate start-up EV automakers,” analysts John Murphy, Aileen Smith, and TT Fletcher wrote in a note to investors.
According to the analysts, Lucid’s management team’s industry experience, as well as its technology and the fact that it has an interesting product in the form of the Air sedan, give it a competitive advantage.
“Although this does not mean that LCID will completely avoid the challenges that many EV start-ups have faced from concept to commercialization,” they wrote, “we assign much more credibility to LCID’s success in this endeavor.”
GM and others
On September 30, Morgan Stanley analysts led by Stephen Byrd said in a separate note to investors that “electrifying mobility is a long-duration theme with many stocks with favorable exposure.”
According to the analysts, “growing consumer interest in clean energy and mitigating climate change” is driving strong growth across the entire ecosystem.
Best stocks to watch rather than Tesla
Analysts prefer mainland China-traded equities in the technology sector, particularly semiconductor and software firms, since they are still developing rapidly compared to their worldwide counterparts.
Localization, they said in a Sept. 22 report, is one driver of future growth. The other is “increased R&D and product expansion to broaden addressable markets, with supportive government policies facilitating these efforts.”
Geopolitical tensions between the United States and China have prompted Beijing to invest more in domestic technology. Coronavirus pandemic disruptions have also prompted companies to seek multiple sources of production, particularly near large end-markets such as China.
Here are some of Goldman Sachs’ top picks:
Goldman rates GigaDevices GigaDevice is rated a “buy” on the Shanghai Stock Exchange, based on expectations that semiconductor technologies MCU and DRAM will drive growth through 2025.
The Goldman analysts are especially bullish on an automotive MCU that GigaDevice expects to sell in volume next year. The semiconductor industry is experiencing a chip shortage, particularly for automobiles.
“Once customers have adopted GigaDevice’s products, it is unlikely that they will swap out of GigaDevice’s MCUs or DRAM when foreign supply becomes abundant,” the report stated, “because doing so is costly for customers, and customers also recognize the need for urgent localization to avoid trade tension risks.”
StarPower\sShanghai-traded StarPower is rated “buy” by Goldman analysts and is on their conviction list. According to the report, the company is a “key local beneficiary” of the growth in electric vehicles.
Growth in the Chinese electric vehicle market will drive demand for a type of semiconductor known as IGBT — a sector in which StarPower and China peer Silan are expected to have a 46 percent market share by 2025.
However, due to the company’s recent share price rally, they have a neutral rating on it and are looking for positive developments such as improvements in US-China relations and a meaningful increase in orders from global customers, according to the report.
It is worth noting that this is not the first time China has attempted to build its own chipmakers. Multiple state-led efforts to build up the local semiconductor industry have struggled to take off, according to McKinsey analysts in 2014.
JPMorgan upgrades DuPont
Analyst Stephen Tusa raised DuPont from neutral to overweight in a note to clients on Monday, saying that supply chain disruptions in key markets such as auto and electronics have confused the market about where the stock should be.
“These end markets used to be early cycle, and a deceleration would signal a shift in focus away from DD, almost for the rest of the cycle,” the note said. “However, with supply chain issues pushing forward growth, these markets are now more ‘mid cycle’ in nature, with auto in particular stuck well below trend.” “Most importantly, DD has one of the most appealing positionings in both markets, with outgrowth potential and high margins.”
The stock has underperformed the broader market and its industry, falling 2.8 percent year to date and more than 12 percent in the last three months. According to JPMorgan, a slump of this magnitude usually indicates that it is time to buy DuPont.
“When considering the cycle, DD has already de-rated to its historical 40% mid-cycle discount versus the sector when compared to past experience, which is typically a buy signal, albeit earlier than usual. We are cutting ’21 numbers today, but a shift forward in earnings drives an increase in ’22/’23, which is now above consensus,” the note said.
Elsewhere in the materials sector, JPMorgan’s Tusa downgraded 3M to neutral from overweight, citing “more structural business quality issues and liability overhangs.”
Barclays upgrades Union Pacific
“With current volume pressure likely a function of constraints across the global supply chain (e.g., labor, equipment, and inventory shortages) rather than a signal of waning demand,” the note said, “we see fundamentals improving in 2022 as headwinds abate.” “Of course, reduced fiscal and monetary policy support in the United States could have a negative impact on consumer consumption and thus rail demand, but relatively low inventory levels imply some near-term support for transportation fundamentals.”
Inflation, the other major concern stemming from supply chain issues, should not be an issue for Union Pacific, according to Barclays.
“While current supply challenges are affecting volumes, we expect pricing to be a significant tailwind for companies like Union Pacific, which can pass on inflation pressures while delivering cost productivity,” according to the note.