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As is true with both major car companies and niche manufacturers, China is the future. It was supposed to be not only the largest market but one that would grow rapidly for years. The United States and Europe would be eclipsed in their importance. However, the growth in China has reversed. Many of the world’s largest car companies are in trouble there. At the same time, it appears that Tesla Inc. (NASDAQ: TLSA) is an emerging winner. It was not supposed to be.
Ford Motor Co. (NYSE: F) and its China partners posted a 30% drop in unit sales to 131,060 during the third quarter. General Motors Co. (NYSE: GM) reported 2019 full-year China sales down 15% to just over 3 million units. GM is the second-largest foreign car company in China. The problems of these two car companies come from model lineups that are not just unpopular but unlikely to be replaced quickly enough with new vehicles to change results this year.
Tesla is not only selling cars in China; it is making them there. Elon Musk has even said he will create a car for the Chinese market, and perhaps export it, something none of the large car companies has done. Another advantage for Musk is that making cars in China means it will not have to pay tariffs. That will become more important if the trade war between China and the United States worsens.
While there is skepticism about Tesla’s China future, optimism otherwise has driven the stock to another all-time high. Tesla’s market value is almost equal that of GM and Ford combined. One reason is that Tesla was not expected to sell several hundred thousand cars in the United States, ever. That forecast has been proven wrong.
Tesla’s success continues to be a miracle for some industry experts. It was supposed to be too small to beat large car companies with big balance sheets and dealer networks. That turned out to be untrue in the United States. The first indications are that it will not be true in China either.
The General Electric Company (NYSE: GE) of 2020 and beyond is likely to look quite different from the GE of a decade earlier. The GE of tomorrow is also going to be less diversified and less leveraged. With so many changes in the air, some investors might be wondering why GE was up 5% on the first trading day of 2020. Investors also have every right to wonder if its stock price has risen too far ahead of the actual progress in its ongoing recovery.
GE is no longer a member of the Dow Jones Industrial Average, and its market capitalization rate of $100 billion or so is no longer that impressive in the grand scheme of things. It is not even in the top 60 U.S. stocks by market capitalization within the S&P 500. That said, GE rallied about 50% over the last year, the most annual gain in two or three decades, and there are enough analysts and investors who remain negative that some investors are going to be worried about GE’s 2020 prospects.
With shares close to $11.70, GE has a consensus analyst target price of just $10.78 from the Refinitiv sell-side group. What happened was that GE’s shares rose nearly 30% over the fourth quarter of 2019 and many analysts have not yet adjusted their price targets and expectations ahead.SPONSORED BY JUST ANSWER
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CEO Larry Culp is going to have to keep pressing on costs and working within the GE culture. There have been accusations that GE was knowingly issuing false data on the long-term care exposure. Still, GE somehow managed to beat earnings expectations in recent quarterly announcements in 2019. GE continues to gear down its leverage as well, targeting a ceiling of 2.5 times its Debt to EBITDA ratio. GE is also targeting a ceiling of 4.5 times its Debt to total capital from its lending operations as it continues to shrink that exposure.
Even under Larry Culp, pruning down GE Capital has been easier to discuss than to actually implement. GE has been in the process of ditching some of its biotech efforts and is working toward a full split away from the Baker Hughes acquisition it made (the company is not called “A GE Company any longer).
Despite a mixed analyst community, the consensus estimates are for earnings of $0.61 per share in 2019, followed by $0.67 per share in 2020 — and Wall Street has a consensus of about $0.82 in earnings per share in 2021. That may not make GE sound expensive on the outer year forecast, but many economists and investors are worried about how long the economic recovery can continue before another recession arises. And to be frank, it’s not likely to see that sort of earnings growth rekindled if the economy is not on solid ground.
The bulls have a hard time justifying what the future earnings power will be. GE remains diversified enough that it always seems to have a problem somewhere. The power unit has had problems, and the Boeing woes are weighing on GE aviation sales expectations. GE cannot just keep selling off operations either, otherwise it will have no series of operations that would keep it qualified as a conglomerate.
During December GE was upgraded to Buy from Neutral and the price target was raised to $14 from $10.50 at UBS. The other side of the coin is that JPMorgan remains firm with its Underweight rating and even has GE as a short-sell candidate. JPMorgan is not even thinking GE will post adjusted earnings that are half of what is expected in 2020 and 2021. One question to ask now is if that $5.00 street-low analyst target has just become to pessimistic even fore the grizzliest of the bears.
With GE’s consensus price target almost $1.00 under the shares after a 5% gain on Thursday, it is at least important to consider that GE has a wide range of targets ($5.00 to $14.00 is not narrow at all for close to an $11.70 stock).
Tesla Inc. (NASDAQ: TSLA) stock rose again on the back of an announcement that it had delivered 112,000 cars in the fourth quarter. Deliveries for the full year reached 367,500, up almost 50% from 2018. Its stock price, at $443 a share, gives it a market value of $80 billion, almost the total market values of General Motors Co. (NYSE: GM) and Ford Motor Co. (NYSE: F) combined. Each of those companies has annual car unit sales that are multiples of Tesla’s.
One reason for the disparity is that Tesla’s share price is up 114% over that past five years. GM’s is up 2% in the same period, which gives it a market value of $52 billion. Ford’s stock is down 40% in that time, which gives it a market cap of $37 billion. That puts the market value of the two big manufacturers together at $89 billion.
The primary argument for the difference in valuations is that Wall Street views Tesla as among the car companies of the future. In fact, some people say Tesla leads that list. Ford and GM are car companies rooted very deeply in the past. Almost all their cars and trucks are gas driven. They have dealership chains, high product development costs and marketing expenses that are in the hundreds of millions of dollars. Each also has to support several brands and a large number of nameplates under those brands. For Ford, this includes Ford and the battered Lincoln. For GM, this includes GMC, Chevy, Buick and the struggling Cadillac. Tesla has to support one brand, with three basic brands: the Model S, Model 3 and Model X. All the cars Americans don’t want to buy are made by huge manufacturers.
While Tesla has an all-electric car lineup, Ford and GM are just entering these markets. Tesla has a semi-autonomous system in its cars, considered more advanced than the GM and Ford systems. Both Ford and GM admit it will take years and billions of dollars to replace their gas fleets with electric vehicles. For example, Ford has just launched its Mustang Mach-E SUV. It will not be available until late this year. And it will be at least another two years before Ford brings mass-market electric vehicles to the U.S. market.
Tesla’s head start may not last over the next several years as the world’s manufacturers try to overtake it. For the time being, however, that is not going to happen.
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JANUARY NEWSLETTER 2