Opportunity Knocks: Two Undervalued Auto Stocks in the EV Era

When it comes to stock investment in the auto sector, electric vehicles (EVs) have stolen the limelight, with companies like Tesla at the forefront. The future is undoubtedly electric, and early birds in the EV market have reaped significant financial rewards. Conversely, traditional automakers have often been overlooked in this electric rush.

However, as the red-hot growth in EV sales begins to cool and profit margins narrow, a twist is emerging: excessive investment in EVs may actually be leading to a potential decline in industry profitability. Meanwhile, manufacturers of internal combustion engine (ICE) vehicles continue to enjoy strong cash flows and are proving to be the hidden gems for discerning investors seeking value.

The Current Auto Industry Standouts

Two particularly undervalued stocks are grabbing attention for their market performance and profit margins: General Motors (GM) and Stellantis. Despite their profitability, both companies sport appealingly low price-to-earnings ratios, making them bargain picks in the eyes of savvy investors.

It's no secret why they're undervalued: Tesla and other EV companies have been the growth drivers for the better part of the last decade, overshadowing legacy automakers.

But what really counts for businesses, especially in tighter capital environments, is cash flow. And it's here that companies like GM and Stellantis shine. GM amassed $11.7 billion in adjusted auto free cash flow in 2023 and anticipates generating between $8 billion and $10 billion in 2024, while Stellantis boasted a substantial 23.5 billion euros in free cash flow over the past year. In comparison, Tesla's free cash flow dipped by 42% in 2023 to $4.4 billion.

There's a strong argument that the traditional ICE truck and SUV segments will continue to churn out robust profits, while EV manufacturers, in their price wars, may encounter thinner margins and lower cash flows.

Exceptional Value That Shouldn't Be Overlooked

The valuation multiples for legacy automakers appear far more enticing when juxtaposed with companies like Tesla, which sees a price-to-earnings ratio nearly tenfold that of its ICE counterparts. This disparity may seem logical to those who believe that the decline of gas-powered vehicles is imminent. However, if the enduring profitability of the cigarette industry, long assumed to be on its decline, is anything to go by, there's a case to be made for the lasting value of automakers like GM and Stellantis.

With the auto industry being particularly challenging, investors are better off with companies that can sustain profitability over the long haul. GM and Stellantis, with their remarkably low valuations and robust business models, are prime candidates that investors are now starting to appreciate.

auto, EV, value