I like the statement below. The point is that the capital market are currently subsidizing your Uber ride. This works until it doesn’t. One day the capital markets won’t be as generous and Uber & company will be in a bind. The business model of looking outside for cheap money won’t work. One of the biggest reason these companies are where they are is access to mountains of cheap cash built on a promise that one day you will be profitable one day. I have a serious question: If you can’t generate internal positive cash flow after so many years of growth, let’s say like Uber and Wework, how successful are you?
If you wake up on a Casper mattress, work out with a Peloton before breakfast, Uber to your desk at a WeWork, order DoorDash for lunch, take a Lyft home, and get dinner through Postmates, you’ve interacted with seven companies that will collectively lose nearly $14 billion this year. If you use Lime scooters to bop around the city, download Wag to walk your dog, and sign up for Blue Apron to make a meal, that’s three more brands that have never recorded a dime in earnings, or have seen their valuations fall by more than 50 percent.
It’s hard to make sense of what’s happening in the stock market. There’s no simple explanation to why certain profitable companies can trade at 10x Price-Earnings (PE) or why money-losing companies are trading at 100x. The automobile industry is an example. There has been little appetite for traditional auto makers like GM and Ford. Tesla (TSLA) captures all the electric-vehicle (EV) enthusiasm. Tesla is trading at $930 a share, up 200% in a year and 121% less than two months in 2020.
Below is the market capitalization of some of the main auto manufacturers with total car sold in 2019:
Toyota Motor: $196b, 10.7m cars
Tesla: Market cap: $168b, 367,500 cars
Volkswagen: $90b, 10.9m cars
GM: $50b, 7.7m
Honda Motor: $47b, 4.8m
Ford: $32, 4.9m
Fiat Chrysler: $26b, 4.3m
Tesla
How has Tesla surpassed Volkswagen which sells 30 times more cars? How does Tesla’s valuation dwarfs the combined market value of Ford, General Motors, and Fiat Chrysler? Globally, the only competitor Tesla trails is Toyota Motor at $196b.
Of course profits, cash flow, and valuation are important. But in the short-term what matters the most is story telling. Tesla and Elon Musk are pushing are very interesting story: Tesla is the car of the future. They are revolutionizing the car industry and saving the planet along the way. Tesla’s cars are cool and high-tech. It’s a computer on wheels. They are a status symbol. Now compare that story to Ford’s “have you driven a Ford lately?” (I have no clue if that’s still their thing). The point is one car company are making investors excited and the others are not.
The belief in Tesla is cult like. You can throw anything at Tesla and the stock just keeps going up. Just last week there has been a car recall, a SEC subpoena, $2b of new shares issued, explosion in warranty expenses, and yet the market doesn’t care. That’s on the top of losing over $700m in 2019. The SEC revelation, that alone, can spook investors. They check up on company accounting and financial practices and nobody seems to care.
The value of a stock is based on future expectations. In this case, the market believes that Tesla will become the biggest and most profitable car company in the world. Over the long term, the expectation is that revenue growth will translate into growth in profits and free cash flow. The value of any investment is the present value of future free cash flows. The market also believe that Tesla’s rise reflects investor expectations that the company will remain at the cutting edge of technological change in the auto industry.
It’s important to note that growth does not always create value. A company can grow, but if it doesn’t earn above the cost of capital, that growth destroys value. In order for growth to create value, a company must earn returns above its cost of capital.
Ford
What’s going on with Ford? It hasn’t been an easy year or five years for Ford. The stock has been an absolute dog for years despite seeing their trucks everywhere. The F-series is one the best selling vehicle every year. They are nice. They are a symbol. They are fun. And they are expensive and very profitable. The upcoming Bronco has a nice buzz around it and the Mustang Mach-E has a big reservation list. Still none of that seems to matter. The stock is around $8, half of what they were a couple years ago. It has a juicy dividend of 7.4%. But…the most important question is will they cut it? The current dividend commitment is $2.4 billion annually and guided $2.4-$3.4b for 2020 in free cash flow. Ford does have a strong balance sheet with a cash position of $22 billion and its liquidity, which includes lines of credit, totaled about $35 billion. Ford has to fund the dividend, its capital plan and a restructuring.
They are in a $11b turnaround that never seems to end. Ford disappointed investors with its earnings and guidance.The current CEO seems to be on the right path despite the never ending issues. He adopted the playbook that other companies, like GM and Fiat Chrysler, are now using which is a larger focus on profitably vs market share. These companies were trying to be everything for everyone and it’s not working.
The car industry is changing fast and Ford is in the middle of that struggle. The last five years hasn’t been good for Ford. The main question is what will the next five be like?
GM
There’s no love for GM. The story here is that GM is an old traditional auto maker, not one that is taking a plunge in the future.
Every year the stock seems to get cheaper on an earning basis, but cash flow ultimately came up short for one reason or another. GM trades for less than 6 times estimated 2020 earnings and Ford sells for 7 times. The comparable figure for Tesla stock is about 88 times. Is 2020 the year for GM?
GM does have a plan for an all-electric future featuring leading-edge autonomous-driving technology with their Cruise division (valued at $19b alone but that’s because of Softbank’s investment, so they probably paid too much like everything else). GM is saying the right things by addressing climate change and decarbonization.
The market gives little credit to the huge amount of cash GM generates. For 2020, it forecast almost $7 billion of free cash flow. At that level, GM stock, trading at $35, would have a free-cash-flow yield of almost 13% (vs the S&P 500 index’s FCF yield is about 3.7% and Toyota of 0.8%).
Something needs to happen. The stock hasn’t done anything since its IPO except the nice dividend of 4.3%. Nevertheless I’m confident in GM.
Fiat Chrysler
I don’t have much to say on Fiat Chrysler (FCAU). It’s a favorite for certain part of the value investing community. I know Mohnish Pabrai likes it a lot was an important holding of his for years. I think Sergio Marchionne was a good CEO. He was focused on capital allocation and has a famous presentation on the topic: FCA Presentation – Confessions of a Capital Junkie. Basically the message was the industry has not earned its cost of capital over a cycle and consolidation is the answer. Which explains why he was always trying to sell itself to GM, Ford, and whoever was interested, which confuses me. Spin this, buy that, sell that, split this etc…they are not mergin in Peugeot. Will Americans buy French cars? Peugeot and Fiat trade for just 5.8 times and 4.9 times estimated 2020 earnings because nobody cares.
Sergio wouldn’t be happy with these numbers.
Fiat Chrysler has some good brands. I think the RAM and Jeep are strong and could be stand alone. But the main problem with Fiat is that they are behind in the EV game and R&D. They are behind in playing catch up.
I’m currently on the road to L.A. and going to San Diego. I want to thanks the new followers to the blog. I recently got a “surge” in traffic and new followers despite not posting anything new in a couple weeks. Thank you for following.
Charlie Munger
I attended the Charlie Munger Daily Journal AGM. It was a good one. They even had breakfast this year. Not sure if it was Peter Kaufman or Charlie’s idea to put up with the bill. The number of attendees is growing every year which explains the change of location. This year’s location was in a conference room attached to at the Cathedral Plaza in downtown L.A. This plays well with the cult behavior of the people following Charlie Munger because they are definitely not there for the Daily Journal yearly update. I don’t minimize the impact of cult like behavior. People flew from all over the world, mostly China, to hear him talk, even though it’s broadcast online. Some people can’t ask him a question without a one minute opener on how much they love the guy.
Charlie is 96 years old. I found him to be in better shape than he was two years ago last time I saw him. He was steady and solid throughout the two hour meeting. It’s too bad that he doesn’t stick around after the meeting anymore. The meeting is way too big now. A couple years ago he used to linger around a little longer after the official portion of the meeting was over and field all kind of questions. The best part was that he was unfiltered. People are a little bit looser when you know you are not on camera. But with cells phones these days, you are constantly being watched. You can find some of the old videos of the after-meeting circulating on Youtube. I don’t think Munger wanted this to be online for the world to see. Despite the recordings being enjoyable, that was also the last time he did it. Anyway that would be impossible to do today, the meeting is way too big.
Regarding Munger’s wisdom, there was nothing you didn’t already know. It’s like going to church. You know what is going to be said. It’s just good to hear it again. It’s re-centers you. Munger talks about rationality, expectations, circle of competence, and of course a good meeting is never completed without an Elon Musk joke.
I’m currently on the road. I wish I could elaborate with notes and everything. But everything is already online.
The best part of these meetings is regrouping with some value investor friends. I also took the occasion to have dinner with insurance investors to pick their brain.
Los Angeles
It’s my second time in the city and realized I’ve barely seen the city. Everything I’ve done is around three city block in downtown L.A. I wish I had an extra day just to be a tourist to dig into everything L.A. has to offer.
L.A. is a weird city. It’s basically a bunch of boroughs looking for a city. It’s sprawled out in every direction. You can lose two hours just going from one neighborhood to another. People identified themselves with their borough. Normally a big city has a downtown. That downtown becomes the center of gravity. That’s where things are happening. That’s where people want to go. Except for L.A. It was built differently and it grew very rapidly. L.A. does have a nice downtown that is recently “renovated”. You can hangout downtown now but I don’t think people live here. Basically if you visit L.A., you don’t spend a lot of time downtown. You go to the different boroughs, like Hollywood.
Homeless
Any major city has a homeless problem. L.A.’s homeless situation is a major homeless problem. I almost crushed one walking because he was the same color as the sidewalk. It was a last minute miss. I heard about the L.A. homeless problem in the news. But when you see it with your own eyes it really hits you. It’s really bad. It has moved from big city “inconvenience” to its society’s problem. Everybody is affected by this. It’s everybody’s problem. The sidewalks are covered with tents. They are micro communities inside a community. I saw a guy with a broom dusting the sidewalk in front of his tent. Another one seriously working out. Some of these tents are actually pretty nice.
I don’t know what the solution is. It’s easy to point out the problem. It’s much harder to solve it. My guess is the majority of the homeless can be helped. They don’t want to be on the street. There’s also a minority of homeless that have serious mental issues. They need serious help. This is a community problem, a city problem, a state problem, a national problem, a global problem. It’s not a “other people problem”. It’s our problem. The homeless situation seems to have gotten worse since last time I was here in 2018. I don’t think it’s going in the right direction. Why so homeless many in L.A.? Look at it this way. If I was homeless, I would also be in L.A. also. Everybody wants to be in California. There are just too many people here.
What can we do? It’s a WE. We need to come together and work on solutions. They just can’t move. If it’s a drug problem, we can help. If it’s a health problem, we can help. If it’s a job problem, we can help. Can we build a mega social housing complex with running water and electricity? The solution can then be applied to other cities. It’s not easy, but sometimes a problem can be turned into a positive. It’s the old saying, in a crisis there are opportunities. Munger talks about when you inverting the problem to solve it. Invert, always invert.
San Diego
As I’m writing this I’m on my way towards San Diego. I’m taking the Amtrak train down and I heard it’s one of the nicest scenery train ride in the U.S. So far so good.
Brian Langis 