The stock market is supposed to be efficient, discounting all available information into corporate valuations immediately. It’s pretty good at being efficient, but not everything makes sense all the time.
Take the multi-trillion-dollar car industry. It isn’t easy to square how shares of different auto makers are valued.
Start in the U.S.
General Motors
and
Ford Motor
trade for about 4 times and 6 times estimated 2024 earnings, respectively. (GM, by the way, has actually made more money and returned more cash to shareholders in recent years.)
Investors award them low multiples of earnings because they haven’t grown sales or earnings consistently, and aren’t expected to in coming years. They also face the challenge of successfully transitioning to a more electric future, defending market share against the likes of
Rivian Automotive
and
Tesla.
EV competition can be effective. In China, all-electric vehicles already account for about 25% of the total market for passenger cars. Car makers that started out producing gasoline-powered cars have seen their market size eroded as all-electric players such as Tesla,
BYD,
NIO,
Li Auto,
and
XPeng
have taken the lion’s share of China’s EV market.
Where do shares of traditional players
SAIC Motor
and
Great Wall Motor
trade? Both stocks fetch multiples of more than 10 times estimated 2024 earnings. Are they growing earnings materially faster than GM or Ford? Nope.
If GM shares traded like a traditional Chinese car company, shares would be roughly $80, up more than 100% from recent levels.
Now go to Japan. If GM shares traded like
Toyota Motor
and
Honda Motor
they would be in the $60 range, up about 100%. Japanese auto makers trade for roughly 7 times to 9 times estimated 2024 earnings.
American auto investors can’t look to Korea when arguing for higher multiples, though.
Kia
and
Hyundai Motor
trade like GM at about 4 times estimated 2024 earnings.
Are any of Ford, GM, Toyota, Honda, Kia, or Hyundai expected to generate material earnings growth over the coming three years, according to Wall Street? Nope.
At least Ford and GM stocks don’t trade like shares of a diversified European auto maker.
Volkswagen
and
Stellantis
shares trade for less than 4 times estimated 2024 earnings.
Renault
trades for less than 3 times earnings.
Traditional car investors just won’t pay up for car stocks. Tech investors don’t mind paying big multiples. Tesla trades for about 60 times estimated 2024 earnings. It might make value investors’ heads spin, but that isn’t impossible to justify. Earnings at Tesla are expected to grow at about 30% a year on average for the coming few years. That gives Tesla a price-to-earnings-to-growth ratio, or PEG ratio, of about 2 times. The
S&P 500
PEG ratio is about 2 times as well.
Tesla EV peer BYD, however, is also expected to grow earnings per share at about 30% a year on average for the coming few years. Its shares trade for about 14 times estimated 2024 earnings.
Why the gap? Who knows.
Tesla and BYD only sell vehicles with batteries. Not all EV makers make money which leads investors to value them on metrics such as price to sales. Those multiples don’t make much sense, either.
Including the market value of stock and the debt, Rivian trades for less than 2 times estimated 2024 sales.
Lucid
trades for about 5 times. NIO and XPeng trade for roughly 1 times and 2 times estimated sales, respectively. Li Auto, which is now profitable, trades for about 1 times.
Tesla, as a benchmark for valuation, trades for about 6 times sales. Investors probably shouldn’t try to figure out any of these relative valuations. They don’t really make a lot of sense based on size, growth, or profitability. They just are what they are.
The best explanation might be that different groups of investors simply don’t talk with one another. U.S. growth investors don’t hold GM shares and they don’t really think about how U.S. value investors feel about either GM or Tesla. What’s more, Chinese, Japanese, Korean, European, and U.S. investors don’t worry about what each other are doing. They all stick to their own markets.
That might be an opportunity for globally-minded investors. Stellantis and BYD valuations stick out and both stocks have U.S.-listed American depositary receipts that trade under the symbols “STLA” and “BYDDY,” respectively.
U.S. growth investors can look at BYD. Value investors can look at Stellantis. What neither group should do is try to figure out a unified theory of why car stocks trade like they do. That will just frustrate them.
Write to Al Root at allen.root@dowjones.com
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