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How to Re-align Investors’ Thinking About Winners and Losers in the Automotive Space

With the perception that the U.S. auto industry has peaked and disruptive technologies are beginning to affect entrenched suppliers, historically cheap valuations are not enough for many investors to commit funds to the sector. In fact, as one portfolio manager recently told us, “It’s less about short-term guidance, and more about perception.”

Many investors believe that the disruptive forces affecting the industry are happening now and justify shrinking valuations. This view is supported by media coverage of statements from OEMs like Volvo that announced their planned phase-out of cars running purely internal-combustion engines in favor of all-electric and hybrid vehicles. Still, the data suggests that adoption of these technologies are in their infancy with a long and potentially winding road to meaningful adoption. Despite that, stocks like Tesla are still commanding wildly premium valuations.

Intelligence we have gathered from generalists and auto-specific investors indicates the key to investing in the sector is compelling stories that include superior positioning around disruptive technologies, such as electrification and autonomous driving, increasing content per vehicle, and/or having global reach that diversifies their dependence from U.S. production schedules.

Investors want to be confident that they are investing in companies that are actively leading the industry into the future over the next five years -- not necessarily the next 30 years.  Therefore, it’s essential that automotive companies continue to clearly communicate how they’re driving value in current business lines, as well as their vision that encompasses the future of the industry.  These messages should be articulated in all investor presentations, conference calls, on the website, and in other interactions with investors. For example:

  • Present a roadmap for increasing content per vehicle. Particularly in an environment of lower U.S. production, a roadmap will help investors understand a company’s strategy for capturing the opportunities presented by this evolving industry landscape. Regular updates on achieving milestones on product introductions and incorporation into platforms will help reinforce investor confidence.
  • Outline capital allocation priorities. How is management allocating capital to organic and inorganic growth opportunities, including new technologies? Almost always, incumbent competitors are in the best position to capture disruptive opportunities, with their financial resources, access to markets and technology. Give investors insight into the company’s investment priorities, in terms of resources devoted to product development, acquisitions, and new programs to fully capture the opportunities presented in the changing landscape.
  • Showcase the company’s strategic advantages/differentiation. Demonstrate domain expertise, with the technical and management talent that supports the company’s ability to execute on its strategy. In this evolving industry, detail how the company is positioned for future success. How is it leveraging core competencies to expand internal capabilities?
  • Talk to a different investor audience. While some buy-siders are reducing their exposures to the automotive sector, many thematic investors and stock pickers remain focused on solid investment stories at attractive valuations. Smart, active investors continually look for companies with good businesses that are led by strong management teams, have a differentiated operating model, and a strategy that will deliver faster-than-market growth. Companies should spend more time identifying these investors and introducing them to their story, instead of depending on automotive sell-side conferences to meet with the usual suspects.

Ultimately, disruption creates growth opportunities, even as it presents threats to certain business lines. A CEO needs to take charge of presenting a vision for the future that rationally addresses industry trends, and demonstrates how a company’s unique positioning, technology and manufacturing expertise will allow it to thrive in this new environment.