Many people looking into buying a new automobile in 2021 have run into at least one scenario where the model they are looking for simply isn’t available for purchase.
At the onset of the Covid-19 pandemic, auto manufacturers cut back on chip orders in expectation of a massive drop in demand, but this decision backfired. Tech companies swooped in to snap up the newly-available semiconductor manufacturing capacity, and when the demand for new cars began to pick back up sooner than expected, the global chip shortage made it difficult for auto manufacturers to order the chips that are necessary to complete their vehicles.
The chip shortage has effectively stalled the production of some automobiles to various degrees. A recent report from AutoForecast gives some insight on which specific automakers and models are bearing the brunt of this impact. According to the report, Ford Motor Co. (F, Financial) has suffered the worst impact, having taken 324,616 vehicles out of production as a result of the shortage, including 109,710 F-series vehicles. Next is General Motors Co. (GM, Financial), which has removed 277,966 cars from its production plans, followed by Stellantis NV (STLA, Financial), which has reduced production by 252,193 units.
All three of these companies have also seen their share prices increase significantly this year due to the higher demand for new cars and promising electric vehicle programs. Given the chip shortages, are shares getting overheated or are these companies still in a good position to provide investors with capital gains?
Shortages vs. sales
The Ford F-150 truck has become the poster child for the automotive chip shortage in the U.S. Ford has taken to storing fleets of the brand-new vehicles in parking lots – they only need the proper chips in order to hit the market, but they can’t operate without those essential components. Unmet demand for this vehicle is so high that in some cases, used F-150 trucks can be sold for higher than their original purchase price.
The chip shortage doesn’t seem to be a short-term issue either. The global demand for semiconductors in a wide variety of applications has risen faster than production capacity, and that demand increase is here to stay.
In 2020 alone, global semiconductor sales increased 6.5% to $439 billion, according to the Semiconductor Industry Association. For the 2021 to 2026 period, the Semiconductor Industry Landscape report expects the market for semiconductors to see a compound annual growth rate of 6%, driven by consumer electronics, artificial intelligence, internet of things and advanced customized chips.
"In the supply chain, missing just one part means you cannot produce the entire vehicle that uses the part,” commented market analyst Jon Gabrielsen on the automotive chip shortage. “But with chips, it is any one of dozens of chips. And unlike a temporary delay due to a late shipment or even Covid impacting a single supplier plant, it takes years to design, build, and start up a chip plant so getting beyond the situation is not a short-term issue."
Just about every automaker around the globe has reduced production, temporarily closed factories and issued temporary layoffs of employees. The extent of these reductions is not yet clear to the public, but the more production is reduced and the longer such reductions continue, the higher the chance that sales will begin to decline. After all, once a new car leaves the lot, it’s a used car, and the manufacturer doesn’t profit from the sale of used cars.
Of course, tech companies won’t just sit back and let semiconductor shortages mount when there are profits to be earned. Many are looking into expanding production capacity or, in the case of tech companies that do not yet produce chips, establishing foundries of their own. Intel Corp. (INTC, Financial), for example, expects to see 10 “good years” of growth in the semiconductor industry and is investing $20 billion to build a chip fabrication plant in Arizona.
“We believe the market, the world, is in a very expansionary period,” Intel CEO Pat Gelsinger told CNBC’s Jon Fortt. “I predict there’s 10 good years in front of us, because the world is becoming more digital, and everything digital needs semiconductors.”
Gartner analysts expect that the semiconductor shortage will last until the second quarter of 2022, which is a year away as of the writing of this article. Automakers and industrial sectors are also at the back of the priority list, which exacerbates the problem for them.
Near the end of April, Ford said that its second-quarter vehicle production may be halved and estimated the ongoing chip shortage would cost it about $2.5 billion and about 1.1 million units of lost production in 2021.
Ford CEO Jim Farley said, "There are more whitewater moments ahead for us that we have to navigate. The semiconductor shortage and the impact to production will get worse before it gets better. In fact, we believe our second quarter will be the trough for this year."
Stellantis, the company formed earlier this year from the merger of Fiat Chrysler Automobiles NV and Peugeot SA, also expects the impact from the chip shortage to be worse in the second quarter than it was in the first quarter. The company said in May that while shipments are benefitting from strong consumer demand and retail mix, the semiconductor shortage led to a production loss of around 190,000 vehicles in the first quarter.
Considering the severity of the semiconductor shortage, it seems within the realm of possibility that automotive companies could see their profits come in lower than expected in the second quarter due to reduced production capacity.
However, sales are booming, and for some automakers, the profits from selling so many vehicles so quickly could be enough to make up for reduced production. According to new car salespeople, vehicles aren’t staying on the floor for long, with many selling nearly double the number of vehicles compared to their normal monthly baseline goals.
On June 16, GM said it now expects to bring in adjusted pretax earnings between $8.5 billion and $9.5 billion during the first half of the year, according to Chief Financial Officer Paul Jacobson, which is a dramatic increase from the company’s original guidance of $5.5 billion and could indicate an easing of the industry’s (or, at the very least, GM’s) semiconductor woes. The company said it will take advantage of the sales jump to increase spending on electric and autonomous vehicles to $35 billion through 2025, a 30% increase over its previous plans.
For the full year, GM expects pretax profits “at the higher end” of the $10 billion to $11 billion range and predicts that the combination of the chip shortage and rising inflation will increase its expenses for the second half of the year by up to $3 billion.
Valuations
Given the mixed outlook for automakers as high demand clashes with shortages, their stock prices, which have enjoyed good runs so far in 2021, could turn out to be overheated. On the other hand, those that manage to surpass expectations even during this period could see their prices soar higher, especially given easy comparisons versus 2020, when auto sales were hit hard by the pandemic.
On June 16, shares of Ford traded around $15.03 for a market cap of $59.85 billion, up 70% year to date. The price-earnings ratio is 15.15, which is lower than the industry median of 21.42 but well above the company’s own 10-year median of 8.57. The GuruFocus Value chart rates the stock as significantly overvalued.
Gurus were net buyers of the stock in the third quarter of 2020, but have since become net sellers again. During the first quarter of this year, Ray Dalio (Trades, Portfolio), Mairs and Power (Trades, Portfolio), Lee Ainslie (Trades, Portfolio) and Mario Gabelli (Trades, Portfolio) bought shares of Ford, while Jim Simons (Trades, Portfolio)' Renaissance Technologies, Ken Fisher (Trades, Portfolio), Richard Pzena (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio) were among those selling the stock.
Meanwhile, shares of GM traded around $61.85 on Wednesday for a market cap of $89.49 billion, up 48% year to date. The price-earnings ratio of 9.97 is below the industry median, but it is only slightly above the company’s own 10-year median of 7.97. The GF Value chart rates the stock as significantly overvalued.
Much like with Ford, we see that guru enthusiasm for GM shares picked up in the third quarter of 2020, but has waned since then. Diamond Hill Capital (Trades, Portfolio), George Soros (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio) and Dalio were among the buyers of the stock in the first quarter, while Simons' firm, Murray Stahl (Trades, Portfolio), Robert Olstein (Trades, Portfolio) and Gabelli were among the sellers.
Shares of Stellantis traded hands at around $20.41 apiece on Wednesday for a market cap of $63.88 billion, up 18% for the year. The price-earnings ratio is 116.57, far above the industry median and the company’s own 10-year median of 7.4. The GF Value chart rates the stock as modestly overvalued.
Gurus have been net buyers of Stellantis for the past three quarters as Fiat Chrysler and PSA Group navigated and completed their merger this past January, creating the world’s fourth-largest automaker by volume. In the first quarter, guru buyers of the stock included Prem Watsa (Trades, Portfolio), Simons' firm, Ken Heebner (Trades, Portfolio), Gabelli, Steven Cohen (Trades, Portfolio) and Ruane Cunniff (Trades, Portfolio), while Baillie Gifford (Trades, Portfolio) sold out of its investment.
Conclusion
All in all, it seems like shares of Ford, GM and Stellantis have become overheated this year. While the outlook still seems brighter for the first half of the year, the semiconductor and inflation headwinds should really begin to show their impact on profits in the second half of 2021.
Ford and Stellantis are expecting the chip shortage to negatively impact second-quarter earnings. GM is sending positive signals in terms of its ability to grow its profits for the quarter despite the shortages, but the second half of the year could be a different story.
Of the three, investing gurus seem to be the most enthusiastic about Stellantis, potentially due to its recent merger. All of these companies are investing heavily in EVs, since at this point, any automaker that does not do so is just sitting around waiting to become obsolete.
With the chip shortage expected to last until 2022, automakers are in danger of reporting disappointing results in the near term, which could send share prices tumbling. In the long term, though, their investments in EVs, combined with the potential for demand to become pent-up due to shortages, could drive profits higher than ever once the semiconductor fabrication industry catches up. Perhaps a better buying opportunity will emerge at some point in 2021.
