3 top picks for the EV revolution
Morningstar's Seth Goldstein singles out three undervalued stocks that span the entire electric vehicle supply chain.
Mentioned: Albemarle Corp (ALB), Bayerische Motoren Werke AG (BMWKY), BorgWarner Inc (BWA), Tesla Inc (TSLA)
Lex Hall: Hi, I'm Lex Hall from Morningstar and with me today is Seth Goldstein. He's a Morningstar Equity analyst. He's also the Chairman of Morningstar's Electric Vehicle Committee. We're going to talk about a few stocks in the electric vehicle supply chain which look undervalued and of interest to Seth.
Good day, Seth.
Seth Goldstein: Hi, Lex how are you?
Hall: I'm well thanks. Now let's – your picks span the entire supply chain of electric vehicles we’ll look at a lithium producer, a car parts supplier and a vehicle maker. Let's start with the lithium producer first, which is Albemarle. Tell us about Albemarle.
Goldstein: So Albemarle's largest business is producing lithium. All batteries need lithium, whether they're used in an electric vehicle or whether they're used for energy storage or even something like a smartphone battery. And Albemarle produces lithium at some of the best sources in the world. In fact, the company’s cost advantage in lithium production underpins our narrow economic moat rating. So as we see increased EV adoption, we forecast lithium demand to grow six times over the next decade and as a result, I think we're going to see a lot of lower quality, higher cost lithium supply need to come on line to meet all this demand growth and this should push prices higher towards our $12,000 per metric ton long term forecast. This should benefit Albemarle as one of the lowest cost producers in the world and allow them to grow profits meaningfully over the next decade.
Hall: Okay, that sounds pretty interesting. Next on the list is an auto parts supply called BorgWarner. What's your interest in that? Why do you see that as being undervalued?
Goldstein: So BorgWarner sells powertrain components, so components that go into the engines and motors for ICEs, the internal combustion engines, hybrids and pure battery electric vehicles. So we like BorgWarner because they're well positioned to grow sales and profits. Regardless of how fast the transition to EVs from ICEs is. So BorgWarner, can win by selling their traditional turbocharging, ICE powertrain components, and then they can also win by selling more hybrid components as we see the ramp up of hybrids over the next several years. But then they're also very well positioned to grow revenue purely through battery electric vehicle component. So, BorgWarner can grow revenue faster than the general auto industry. Really, regardless of these sort of powertrain mix.
Hall: So they are supplying, BorgWarner is supplying pretty much all the car manufacturers themselves.
Goldstein: They can supply, car manufacturer, regardless of powertrain. They can sell components into their vehicle.
Hall: Well that's pretty interesting. And finally, electric vehicles are obviously synonymous with Tesla, which is in the news every day. We think it's, the US analysts think it's overvalued by a large margin and it's not the only electric vehicle maker we should stress. The name on your list as a car manufacturer is a very old name. It's BMW. Why do you think they have a particular advantage in the electric vehicle space?
Goldstein: So we have a narrow moat rating on BMW due to its brand as one of the best and most luxury car manufacturers in the world. BMW lately has been investing heavily in the development of both EVs, and plug-in hybrids. In fact, they're targeting 12 fully electrified models by 2023, as well as 13 plug-in hybrids, so for a total of 25 somewhat or fully electrified vehicles. Over the long term, we believe these investments will pay off and that BMW will maintain one of the highest levels of profitability of all global automakers, even as they navigate this transition from ICEs to EVs.
Hall: Well that's a pretty big, pretty big lineup of models, especially when you consider that Tesla’s only got 3 or so for the time being. That's some -- so these models from BMW, they obviously, I imagine, span the entire fleet.
Goldstein: They do, you know everything from your traditional coupes and sedans, to your SUVs BMW is investing heavily towards developing an electrified fleet.
Hall: Well, that's very interesting. Alright, so that's Albemarle, BorgWarner and BMW. Seth Goldstein in Chicago for Morningstar US Thanks very much for your insights.
Goldstein: Thanks Lex.
Hall: I’m Lex Hall for Morningstar. Thanks for watching.