In this episode of Industry Focus: Energy, host Nick Sciple and Motley Fool auto specialist John Rosevear break down President Joe Biden’s electric vehicle executive order and take a look at earnings for Ford (NYSE:F), GM (NYSE:GM), BMW (OTC:BAMXF), Ferrari (NYSE:RACE), and more!
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This video was recorded on August 5, 2021.
Nick Sciple: Welcome to Industry Focus. I’m Nick Sciple. This week, John Rosevear returns to the show for a look at what’s going on with big auto. John, how’s your summer been?
John Rosevear: It’s been great, I think you know, but our viewers may not know. I have three college kids, and they’ve been in and out all summer with friends and so forth, and it’s been a fun time.
Sciple: Very exciting. I’ve also been running around. I don’t know if these folks know I’ve gotten married. Over the past year, John, we’ve talked a lot about electric vehicles and the future of automotive. There’s been constant news, really, like I said, for the past year or so. Today is no different. Just today, President Biden has announced that he is going to sign an executive order to put forward a new national target for zero-emissions vehicles, the numbers being reported is up to 50% of cars sold in the U.S.A. by 2030, targeting to be the zero-emissions vehicles. Where does this fit into this EV story we’ve been talking about for so long, John?
Rosevear: It’s another step forward. I think we’ve already seen, if you look at the financials of companies like GM and Ford, they’re already spending money on EVs. They’ve announced these big cash commitments. But you can see it in their R&D dollars, their CapEx dollars, and so forth that the money is getting spent. What they always want is some assurance that buyers are going to show up for whatever it is the government wants them to build. They are all three, Stellantis too now, which is the post-merge Fiat Chrysler and Peugeot. Stellantis is the third of the big three, although Stellantis is more global-focused, but we’ll get back to that. But anyway, what they always want is to know that there’s a three-, four-year lead time developing new vehicles, sometimes longer when you’re doing things like developing new drive trains and new battery technology and so forth. They want to know that when they spend the money upfront, three, four years later, buyers are going to show up to get them.
What they’re hoping for from the government is some support around infrastructure. We need better charging networks in the United States, we need chargers in more places, we need more fast chargers, and so on and so forth and also maybe with incentives. We saw how incentives helped Tesla (NASDAQ:TSLA) get rolling back in the day. Maybe we extend those a little further. Maybe we position them around more entry-level vehicles or something like that so that we know that buyers are going to have a little extra motivation to choose an electric over a hybrid or internal combustion vehicle in five years or whatever. When a lot of these come to market in the mid-decade it is really about three and a half, four years now, I guess. That’s what they’re looking for, and of course, the Biden administration, the Democrats are happy to deliver that because they see American jobs. China’s rushing into EVs. Europe is increasingly rushing into EVs. We don’t want to be left behind. We want Americans to build them from a White House policy perspective. We want good-paying jobs, union jobs with these three automakers. We want American technology and American know-how to be exporting these vehicles, not importing them. It’s good policy for Democrats, and it’s helpful to have that for Detroit.
Sciple: I think, when you look at some of the moves other governments have made around electric vehicles, I think, in particular Europe, we’ve seen this big upswing in EV production. A big part of that has been driven by the European Union saying, “Listen, if you don’t produce more of these vehicles, we’re going to start dinging you with fines,” all those things. There’s not that in place with this current executive order, but what do you think about what’s going to push automakers past this target to really make the rubber hit the road to use a pan?
Rosevear: Well, I think they want to do it anyway, but I think the stick that comes with this, the carrot is the government’s help with infrastructure and incentives and so forth. The stick, I think, will be announced, I think later today, it might be tomorrow, but I’ve seen some floaters from the White House about this. A comprehensive revamp of fuel economy standards, emission standards. First of all, they’re going back to the Obama-era plan, which was adopted in 2012 or 2013. Again, at the time with the buy-in of the Detroit automakers, that the Trump administration eased some, they’re putting that back in place right away, and then a couple of years out, they’re going to start to make things a lot tighter around fuel economy and emissions. Basically to make it harder to keep selling internal combustion vehicles with higher capabilities, and so forth. At a moment where GM and Ford and Stellantis really don’t want to be spending money developing new internal combustion engines, and so forth, it’s the way things are going to go.
Sciple: You mentioned a few times, John, Ford, GM, Stellantis. Stellantis is a merged company, Fiat, Chrysler, Fuchsia. So traditionally we thought that the big three automakers, it was Ford, GM, Chrysler, this is still kind of Ford, GM, Chrysler kind of standing up there with the president when he signs this executive order. One company you don’t hear included in there, which is always in the conversation when it comes to American electric vehicles, is Tesla. What do you make of Tesla being snubbed here?
Rosevear: I don’t know for sure. My guess is they asked Tesla, Tesla said no, it’s not our party, we’re not interested. Or what I think is more likely is that of course, Tesla is not only nonunion, but they’ve had some fights with United Autoworkers and Democratic administration, very pro-union, good-paying American jobs is the theme for the Biden team and so forth. I think maybe they didn’t want the nonunion shop that’s been fighting with Tesla to become the inside, fighting with the UAW to become the story here when it’s really about good-paying Midwestern blue-collar jobs and swing states where we need them to get reelected. There’s a sort of political calculation. Of course, the Tesla fans on Twitter are screaming about it. But again, Tesla is not the company that needs to hear partly because Tesla has built its own infrastructure to some extent, and it’s already made the investments in electric vehicle technology, just a huge sum of money that you’re talking about with major Detroit manufacturers. They need the reassurance that the government is going to support their effort to go electric. Tesla is also really not the target audience for this necessarily.
Sciple: Tesla is already doing these things. Tesla is already 100% EV, right?
Rosevear: They’ve built out their own charging network and so forth. I think everybody including Tesla would benefit from expanded access to fast chargers. Teslas can use them too, and certainly, in certain parts of the country, you hear us the big lines at Supercharger stations and so forth, and it’s an ongoing gripe certain Tesla owners and some areas where it seems like you have to wait an hour and a half to go with charger so they would benefit from this indirectly as well. If there’s an expansion of incentives it’s possible that future Tesla buyers will receive those incentives as well. I don’t know if they’re going to cap it by the price of the vehicle or what. There was some talk of doing that, but even that Tesla is talking about doing a model below the Model 3 at some point that would presumably qualify just like the Ford and GM vehicles and Chrysler vehicles in that kind of space.
Sciple: We’ll see what happens. I think it shouldn’t be taken away from Tesla being a very significant player in U.S. EVs and I don’t think that that’s going to change depending on whether they are standing behind the president when he signs his executive order. That said, say something about at least from a political point of view, there’s still a certain class of focusing in Washington, maybe other places. Think of the big three as one category and then Tesla and some of these others in another category. Maybe one last thing on the presidential agenda is that 2030 targeting half of AutoZone in the U.S.A. being electric vehicles, in your opinion, how realistic is this timeline? Is this having heaven and earth to be moved to achieve this? Or is this kind of in line with the kind of, where we expect things to move anyway, what are your thoughts?
Rosevear: Heaven and earth have to be moved, but heaven and earth are already moving. I would say assuming they can get the batteries the automakers will have the cars or at least the ability to build that many electric vehicles. We need the buyers to show up to really make it work and that means we don’t need a giant electric vehicle backlash between now and so forth. You can see where this could become a thing. Only crazy liberal economies drive electric vehicles, this and that. But what I think is so significant about Ford’s F150 Lightning is it neatly diffuses that. Here is the best-selling pickup truck and we’re making it electric and that makes it better. It’s important for Ford’s business to get it out there soon, and I think it’s also going to turn out to be a significant product in moving Americans to adopt electric vehicles.
Sciple: Maybe we can move on to forward earnings. John, one of the other things you wanted to talk about today as we’ve seen, big auto across-the-board report earnings over the past week and a half, two weeks, we’ll talk about GM, we’ll talk about Ford, BMW, maybe some others. But let’s start here with Ford having a pretty positive response to earnings back in late July. It has traded down a little bit since then. What were the big themes to pull out from Ford’s earnings report?
Rosevear: Well, I mean, people were expecting a not-so-good quarter because Ford has been, and let’s back up to refresh our memory, there’s an ongoing global shortage of semiconductors, computer chips, particularly the simpler, older-style computer chips that autos are full of that control little things. This is not the latest cutting-edge silicon in a new iPhone. This is older-technology stuff that is still very useful that automakers like because it’s rugged and they know it’ll last 10-15 years in a car which has a harsh environment. There’s been a shortage of that kind of computer chip, and it has really disrupted production for a lot of automakers. Ford has been hit harder than some. They’ve had to cut a lot of production, which is really unfortunate given that they have a brand-new version of their F-150 pickup that would be in very high demand if they can build them that fast, and so forth. Wall Street was expecting a not-very-good quarter, perhaps even a loss. Ford came in with a profit on an adjusted EBITDA basis, which is what we all watch. They made a profit of $1.1 billion versus a loss of $1.9 billion in the second quarter of 2021. Of course, a lot of the factories shut down from COVID, their margins were not quite as high as we’d like and so forth. But it was a respectable quarter and it was again better than Wall Street expected and the story there is that, yeah, we’re not selling as many cars and trucks as we want, but that’s true of everybody, there’s a shortage, there’s very high consumer demand. We’re not offering very much in the way of incentives, we’re getting full price for these, and that is doing great things for our margins.
Sciple: Yeah, John. This reminds me, I tweeted something out about this a few weeks ago. I went with my then fiancé, now wife, we have since been married, to go get some repairs done on her car. We were in the Honda dealership, and all across the dealership, they had in these little plastic display things, articles from Car and Driver and things like that talking about there is this big car shortage, and the translation is, “Listen, we got the cars that we have, we’re going to sell them to you for the price that we name, and if you don’t want it, good luck finding another one.” It sounds like that’s some of what you were describing here, John. It is, “Listen, the cars that are out there, people are going to have to pay what they have to pay.”
Rosevear: Ford is actually, I think this is a temporary situation because of the chip shortage, but they’ve actually lost pickup truck market share because GM has been able, for whatever reasons with its suppliers, to build somewhat more pickups and get them out there. But everybody is selling cars, trucks, SUVs at full-boat prices if not market prices, because I know some of the dealers are doing well off this, the automakers hate that, but [laughs] dealers are independent businesses, they can price things as they want. But where the automakers are saving money is they don’t have to do the incentives. There are still incentives out there for a few things, but they’re nothing like what we would expect to see in normal times, even normal growth-economy times, and that is putting a lot of points on margin.
Sciple: Yeah. When demand is very strong relative to supply, you don’t have to do a lot to sell what you have out there. You mentioned, John, the F-150 Lightning, how this can be a really important product for Ford, maybe an important product for the image of electric vehicles in the U.S. What are we seeing as far as updates on the Lightning and Ford’s EV plans?
Rosevear: Well, Ford said a couple of weeks ago that they are scaling up their ability to build electric vehicles generally because the demand has actually taken them a bit by surprise, first for the Mach-E, which they launched, the Mustang Mach-E, the electric crossover that they launched at the beginning of the year, and also they now have I think 120,000, 125,000 pre-orders for the F-150 Lightning. This is just putting a deposit, the deposit is refundable, but still it’s a strong indication of interest. What they found with the Mach-E was a lot of these $100 reservations converted and became sales, and so they are taking the conversion rate which was very high and looking at the F-150 and trying to scale early production. They’re saying, “We’re going to need more batteries. We’re going to need more motors,” this and that, and so they’re pushing out to their suppliers to make sure they have that in place and ramping up their production capability and ramping up their volume expectations, assuming we get past chip shortage for this thing when it launches in the first half of next year.
Sciple: You mentioned F-150 Lightning, 120,000 reservations, that’s really significant. Why is this product you mentioned more broadly something that you think is important for EVs in general, or could be?
Rosevear: Because it’s an F-150. Ford has serious pickups in the best-selling vehicles in America. They are driven in red states, they’re driven in blue states. Americans are wonderful people and we disagree on many things, but we like pickup trucks. Certainly, an awful lot of people do, and this is the pickup trucks, these visible pickup trucks. Ford is bringing it in at a reasonable price. They are targeting commercial fleet customers who will see a real return on their investment or total cost of ownership that is considerably to their advantage versus maintaining an internal combustion fleet. Ford is making this case strongly to their fleet customers, I think in part because they weren’t sure how retail demand was going to go. They put a lot of effort into selling these to fleets to get the scale early on if retail demand was a little slow to arrive, but I think they’ve been pleasantly surprised by the retail demand. They say a whole lot of these people are new to Ford, first-time Ford customers who are making reservations for their iconic F-150 pickup, and it’s a good truck. The capabilities and so forth that they’ve shown so far are genuinely impressive. It is an F-150.
We know that Ford will beat the heck out of it before they ship it so that they know if it’s terrible, so that they know they can stand behind it. It’s a product you can buy with some trust. If you’ve had F-150s and Ford says, “Okay, here’s the electric F-150. It went through our same durability cycle that all our F-150s go through. We’ve tested it. We’ll stand behind it with the full warranty, you know what you’re getting,” I think a lot of people are really liking that. As I said, that’s across America. That’s not just Teslas for elite tech people or whatever. This is the everyman product, the everywoman product. They do sell a fair number of them to women, I was actually surprised by that, I learned that a few years ago. It’s a thing that reaches into all parts of the United States, including parts of the United States where we might expect if Tesla was really out in front of this and so forth, a little bit of a backlash against Mr. Rocketship or whatever. I think the F-150 is a key product to help move Americans to electric vehicles. Again, by prioritizing commercial deliveries early on and commercial sales early on, what you’ll see is a lot of people driving them at work, and they come on and say, “Man, that’s a nice truck. I’m going to get one,” they tell their friends. So you get a lot of word of mouth and second-order effects off that. It’s why I think it’s such a pivotal product.
To a lesser extent, also the electric transit van, which is coming this fall. That’s another thing. They drive it to work and go, “These Ford electrics are actually pretty solid. They’re really rugged, we’ve been driving it for six months, we banged on it, haven’t had any problems, and it’s nice to drive. Maybe I want to afford electric, or a GM electric, or a Tesla, or whatever,” this spreads the adoption. It spreads the word. As people who have driven electric vehicles, we know that they are fun, and even the mundane ones are fun. But most people still have not driven electric vehicles. When you have them at work, when you’re selling into commercial fleets in big volumes, you get more people behind the wheel of one, and they say, “Well, I like this. I can live with this.”
Sciple: Cool. Any last thoughts here on Ford, John, before we move on to GM?
Rosevear: One thing to note is that a lot of Ford’s profit came from its financial services arm. What’s going on there is that as new cars have become harder to buy, used cars’ prices have soared. We know that. We know that’s a big component of when people say, “Oh, consumer price index is up in the United States, inflation is going on.” We know a lot about cars, new and used light vehicles. What Ford credit is finding is that the vehicles they get back off lease are selling for very good prices at auctions. They had a record quarter for credits, for its financial services arm, that drove a lot of Ford’s profit when we might have expected a loss in the second quarter.
Sciple: Okay, John. Let’s move on to GM now. GM shares fell sharply after earning close to 9% by the end of the day. What did Wall Street see in the earnings that led to that move?
Rosevear: It’s an interesting question because I didn’t know it was dropping. Oh my God, they missed. If you look at the underlying numbers, it was a good quarter. Revenue fell short, that was a clear miss no matter which set of polls you looked at, whether it was Bloomberg or Thomson Reuters, or whatever, some of the other ones we use. Revenue fell short, they shipped more vehicles in the second quarter than we expected. They’ve got thousands and thousands of vehicles that are built except for a couple of computer chips sitting on lots, all through the Midwest with signatures and that is all the time. I saw one lot today where they’re putting 1,000 GM pickups a day into the lot out of one of their full-size pickup factories. It’s just huge. Rows and rows of trucks waiting for these chips to come through. They can’t record their revenue until they’re actually shipped to dealers, until they’re done. There is that and you say, “OK, they missed on revenue, but that’s reasonable.” But their profitability was terrific. Bloomberg expected $2.23 a share. I think Reuters’ estimate was considerably lower. It was an odd thing because there was some divergence there. I don’t remember exactly where GM came in, but it was certainly better than I thought we would see.
Sciple: $1.97 is what I have here.
Rosevear: Yeah, $1.97. I think some people were looking around a buck and a half, and yeah, the profitability is really good here. Their margins were extremely strong. What we see with GM is EBITDA adjusted. It’s operating profit minus one-time items, which weren’t significant this quarter. The 12% EBITDA adjusted margin, that’s big news in the auto business. That’s a really strong margin. Mary Barra is keeping this thing on track. They’re making good money. With GM, a lot of the story is pricing. They have been able to ship a somewhat higher percentage of their vehicles to dealers than perhaps Ford has, especially in North America. They are making some conquest sales, especially in trucks and SUVs in places where Ford dealers might be tapped out because they can get some Silverados to dealers or whatever. They had a very good result in North America, good profit. They too, with their financial services arm, also saw some of the same dynamic we talked about at Ford where the used vehicles coming off lease are getting better returns at auction than they expected. That funds up their profit. GM’s financial pre-tax profit was $1.6 billion, whereas they usually run around $400 million a quarter. That’s very stout and so forth. China is performing better for them. Not back to where it was a couple of years ago, but better than we have seen in the last few quarters. Again, in China, they have also got factories that are limited by chip shortages.
We’ve even seen this with some of the Chinese automakers on electric vehicle maker, MIA, which I know a lot of our viewers follow, has had some of the same chip-related disruption. But Mary Barra has got it on course. They were cautious with guidance. This is also true at a number of other automakers simply because we aren’t sure yet that the chip situation is going to get better by the end of the year. A lot more capacity is coming online, but whether those chips land in September or in next January is still somewhat a fluid situation and I think we’re going to see more detail, and more clarity on expectations maybe over the next 60 days or so.
Sciple: Yeah, the chip shortage thing is something affecting all these automakers to one extent or another and it’s something that’s out of their control. Until the supply chain gets back operating and we can account for those issues, there’s really not much they can do besides, as you mentioned, start parking the cars in the lots and waiting for them to have those modules to put in the vehicle.
Rosevear: I do think, just to be clear, that’s why the guidance was soft because they would rather underpromise and overdeliver. They’d rather have the upside surprise rather than have to say, “Oops, chips didn’t come in in time. We got caught out. We made 100,000 fewer trucks in the quarter than we expected.” Something like that. I think Wall Street was expecting more optimism around chip supplies, really is the story there. It’s not just a jam story, of course.
Sciple: One other line item in the GM earnings, you’ve seen lots of folks talking about this $1.3 billion in warranty recall costs, $800 million of which are attributed to the Bolt EVs or something very much at the top of discussion, and Jim was relatively early among the big automakers to move into electric vehicles with the Bolt. The GM’s actually sold enough of the Bolt to where they no longer receive the federal incentive whenever they sell a GM electric vehicle. But what’s behind this large warranty charge we’re seeing related to the Bolt?
Rosevear: They discovered after investigating some fires and other issues, that there were some relatively small number, as I understand it, battery cells made by their supplier, LG Chem, that may have had a flaw that may be causing some of these problems. What they did was, they recalled every Bolt that might have some of those cells in it, which was 2017-2019, I think. Don’t quote me. If you have a Bolt, check with your dealer to be sure. I don’t want somebody thinking they’re off the hook or they’re under a recall if they’re not. They’re going to replace the battery and that’s expensive. Of course it’s expensive. GM emphasizes that this is not the latest battery technology in the bulk, this is an earlier, better technology. It’s also not their new Ultium Cells, which will come online when the electric Hummer SUV starts shipping later in the year. But this is where they’ve seen a problem and GM has certainly learned its lesson over the last decade that if you’ve got a maybe problem, you jump on it right away even if it’s expensive. Because if you don’t, as we found with their ignition switch recalls several years ago, it will get a lot more expensive if you don’t. It’s them trying to get out in front of a little problem before it becomes a huge problem. It’s expensive. It’s also the right thing to do. Ultimate cost of the recall may not be nearly as high if they find that, in fact, it was only a relatively small number of cars. They may be able to hone down their understanding of which cars are likely to be affected. We’ll see.
Sciple: This goes into that thing we talked about earlier of like, if there’s not some backlash against EVs, I don’t think this is something that would make me concerned. There’s a fire risk with EVs. Very concerned about owning one, but this is the type of thing that goes into this PR tapestry. It’s one of those things you’ll hear folks talking about. GM has released some more details around their EV plans outside of the boat, and what we could expect from the company moving into the future. What’s your view on GM’s EV future?
Rosevear: We should be watching how the next few launches go. The Hummer EV is coming, “GMC Hummer” they’re calling it. Then in the first part of next year, I think it’s the first quarter, a Cadillac electric SUV called the Lyriq, and this is a direct Tesla competitor. Will have the Cadillac flush interior. Word is, it’s very quick, it’s quite stylish looking. What I want to see is that those two launches go off very smoothly because this is their new battery technology now, the Ultium battery technology coming out that we’ve been talking about for a year and a half, two years now. This is production. If these vehicles launch on time, if the production ramps, as our friend Mr. Musk likes to say, go as expected, if early reviews are good, if there are no big recalls or problems right away, that is bullish for GM’s overall EV effort. We’ll be watching that over the next nine months or so. If there are snags, well, I’m not sure it’s dire, but certainly it means that this is not going to go as smoothly as it should and we will have to adjust our roadmaps accordingly. But that’s the big thing to watch, as they roll into their proprietary batteries, their proprietary battery packs, these much-hyped new vehicles, just everything goes as planned. Seems true with Ford really. The marque launched pretty much as planned. There were some early snags in production, but for the most part, it came out pretty much as planned. The F-150 has to come out as planned.
Sciple: It’s another thing you hear Musk talk about, is getting from prototype to scale is one of the most difficult things. Auto industry is among the most difficult manufacturing businesses that are out there. We’ll have to see how those things develop. Moving on from GM and Ford, these North American automakers, let’s look at BMW in Germany. What’s going on with BMW over there in Europe?
Rosevear: BMW had a really big, nearly $6 billion in operating profit versus a $700 million loss a year ago. Of course, they were in Europe, affected by COVID and plans for shutdown. Much as I say, well, here, Indonesia, and everywhere else. What BMW rather has going forward is that they’ve been able to get more chips than most of the others. They have good long-term relationships with their suppliers. The way the dice had fallen. Whereas one of Ford’s suppliers had a factory fire in Japan and this and that, and that has exacerbated their situation. BMW has escaped that. Their suppliers have been able to do fairly well. So they’ve been able to build and ship more vehicles as a percentage of what they might have wanted to do in the second quarter than a lot of their rivals. If you want the Cadillac or you want the Acura or whatever, but the BMW dealer has stock on the lot, you’re going to buy the BMW.
Again, because there are shortages elsewhere, they’ve been able to get great prices, minimal incentives. That’s really what drove it. We’ve got cars people want at a time where cars are relatively scarce. We’re getting good prices for them. We’re selling a lot of them. Their shipments were actually up from the second quarter of 2019 before the pandemic. So clearly, at least temporarily, at least gaining share because they’re able to make and sell and ship the vehicles. That’s great. It was a happy quarter for them. They warned of course that, just like everybody else would say, “We don’t know if we’re going to be hit worse by cheap supplies in the second half of the year. Alternatively, if our competitors’ supplies ease across the industry, this feast will come to an end to some extent.” So they were also somewhat moderate on guidance. But overall, it was an outstanding quarter for them.
Sciple: This is one of those times where the supply chain manager gets to shine. It’s very rare that that becomes front and center, the star of the company. Seems that that’s what’s happening, at least to some extent in the case of BMW. BMW is also on the EV front, working on expanding EVs in Europe, which is a slightly different market. Maybe you can talk about that, John. What’s BMW doing with their EV initiatives?
Rosevear: Well, BMW is an interesting story because they rushed into EVs in the early part of last decade. You remember the i3 and then the i8 hybrid sports car, which had this little three-cylinder engine, but drove like a proper modern sports car and so forth. Some really interesting technologies, carbon fiber technologies and so forth. Then they shut it all down. There was a change of CEO. The board said you’re spending too much money and not making enough money, etc. They then had to come back a couple of years ago and reignite a lot of those programs. Because the board at BMW has been so conservative, they’ve had a little bit of a conservative strategy. We’re going to try to build internal combustion, hybrid, and electric vehicles all from the same architecture, all on the same assembly lines and so forth, because we don’t know how the mixes are going to play out and that way we can respond and so forth.
They’ve evolved a bit from that strategy, they now have some dedicated electric vehicles. There was one out, the version of the X3 SUV that came out, I think, at the end of last year. This fall they are launching the I4 sedan, which is a roughly 3 series sized, fully electric sedan, and also an IX, which is roughly, I think it’s the size of the X5, give or take. An electric SUV, in any event. Those are coming, I think, both this fall. Then there are more coming next year. BMW is saying that they’re going to show more of their plans next month at the auto show in Munich, assuming it happens mid-COVID. But one way or another I expect BMW to make a presentation even if it’s by webcast, talking about what they’re going to do a little longer-term. I think that will be very interesting to watch.
Sciple: BMW operating this European market, you have to put some chips down on EV or you will start getting slapped with fines, which maybe explains that change in path from management. We’ve talked about Ford, GM, and BMW. Are there any other auto stories out there that maybe aren’t among these names that folks are following every day that you think should be on investors’ radar?
Rosevear: Well, let’s talk about Ferrari, Nick. Ferrari is interesting because it’s an automaker and it’s also a luxury company. In a sense, really, its best comps are companies like LVMH, MA, and so forth. Companies like that. In terms of profitability margin, these are very high-priced cars. They limit supply to ensure exclusivity and so forth. They only build about 10,000 cars a year, and even that’s up from 8,000 a few years ago. But that’s accommodating the Chinese market, so this matured, and so forth. Ferrari already had terrific profitability in Q2. We get excited when GM reports 12% EBITDA margin, when BMW reports a 10%, 12% EBITDA margin. Ferrari’s was 26.5%. We’re accustomed to seeing Ferrari in the 20%-24% range. As I said, this a luxury company. Twenty-six and a half is a good quota even for Ferrari. But the story isn’t about chips. You go to the Lamborghini dealer and they’re fresh out, so you gotta go buy a Ferrari, that’s not how it works. All these cars are built to order and they’re getting enough chips. When you build 10,000 vehicles a year, you’re not having trouble getting chips. The story here is they have a new model and it’s a hybrid. This car is called the SF90 Stradale.
Normally, when we talk about Ferrari, we talk about the ratio of V8-powered models to V12-powered models. When we look at their profitability from an analytical viewpoint, the v12-powered models are more expensive, they’re more exclusive, they have better margins, and so forth. We look at that mix every quarter. The SF90 Stradale is actually a V8 model, but it’s a hybrid and it’s priced and positioned like a 12-cylinder model, which if you’re deep into Ferrari, this is really interesting. Anyway, the price tag, this car starts at $625,000. It is the first Ferrari hybrid that isn’t an exclusive limited edition where you have to be invited to buy one. Theoretically, anybody can walk into a Ferrari dealer and order one if you have the means, as they say. From the reviews, I highly recommend picking one up. This is a 1,000-horsepower car that’s getting rave reviews from all of the car magazines and so forth. It’s what their Formula One drivers drive. They did a whole video of it of their Formula One drivers, Carlos Sainz, Sean Leclerc, out on the track playing with these things and so forth. They were both like, “These are young guys and they get to drive this car.” Like, “Wow; this is great.” What happened in the second quarter is they started shipping this very high-priced new model with great margins for which there has been considerable early demand among their extremely well-heeled client base. It was able to recall the revenue and that pushed their margins way up. They too warn that margins will moderate somewhat in the second half of the year because the next new models to come out are V8s, and that’s going to make up a disproportionate share as they ship. It’s a revised version of their Portofino convertible, and the Ferrari Roma, which is a new product for them. It’s sleek, smooth; what they call it Gran Turismo, a GT. More of a cruiser than a track car. There has been very good demand for it in China.
Some interesting notes about Ferrari; they took a record number of orders in June, a record month for them in terms of new orders. Their order book now stretches well into next year. Acting CEO John Elkann also noted that they’re seeing more and more women buy Ferraris. In China, one in five of their buyers are women. This is very interesting to them. They are noting a positive response, more women coming, particularly with the Roma, the car we just talked about. That’s a good trend for them in terms of their longer-term order book and so forth. It’s a little business. I know not a lot of people follow it, but it’s Ferrari, it’s cool. I’m a car guy. It’s an extremely profitable, successful little business.
Sciple: Well, so I’ll give you three maybe bullet points to pull out of there. No. 1, this SF90 Stradale: $625,000 price tag. We just saw Bezos and Branson go to space. You can get a ticket to space with Virgin Galactic for $250,000. It’s literally cheaper to go to space than it is to get this car; No. 1. No. 2: We are in this world of hyper-performance vehicles now, or hybrid. You can get better performance out of our hybrid than you can get out of a traditional vehicle. You see the Formula One cars are hybrid today. This is the development of it. It’s not just like, you want to save the environment driving your Prius, if you want to have the absolute pinnacle of performance, a hybrid can help deliver that for you today. Then also just how many rich people are there out there? It’s incredible. […] are buying these cars on a yearly basis. Ferrari, if you look at the market, this is a big company. When you look at the size of the business —
Rosevear: It’s a company with like 3,000 employees or something. Ferrari is a lot smaller than people think it is as an actual company. It’s one factory plus a little body plant, like 20 miles away, and their Formula One team. They’re doing very well, thank you.
Sciple: Just look it up; a market cap of over $40 billion. This tiny little company, they’re doing very well. I hope I have the opportunity to pick up an SF90 Stradale. I don’t think it’s particularly likely. But Ferrari, if you’re listening and you want to take me and John out for a test drive, we will take you up on that. But until then, John, always love having you on the podcast. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against the stocks discussed, so don’t buy or sell anything based solely on what you hear. Thanks to Tim Sparks for mixing the show. For John Rosevear, I’m Nick Sciple. Thanks for listening and Fool on.
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