Sector spotlight: automobiles & parts

Today I am focusing on automobiles and parts as investments, do any of the share prices in the sector look tempting?

Article updated: 17 June 2020 2:00pm Author: Michael Baxter

The car industry has got challenges. The Covid-19 crisis will exacerbate these challenges, both short and long-term.

Let’s consider the prognosis for this industry as it stood pre-Covid. The rise of electric cars caught many companies napping. I think the core problem here is that battery technology has been advancing exponentially. It has been falling in cost at a rapid rate — from around $1,000 a kilowatt hour in 2008 to less than $200 today, while simultaneously the technology has been advancing.

Electric cars

Five years ago, based on state of the art technology at that time, electric cars seemed like a hopeless case and I got criticised here for saying otherwise. Electric cars were expensive, they had very limited driving range per recharge, it took ages to recharge batteries, and the infrastructure for electric vehicle recharging was limited. To rub salt into the wound, the process of making lithium ion batteries that charge electric vehicles was not kind on the environment.

But all of that has changed and it has become obvious that it will continue to change.

Costs have fallen, the manufacturing process has become cleaner, cars can now travel much further before they need recharging, the charging infrastructure has improved enormously and the time it takes to recharge an electric car has shortened.

Most important of all, the expected life of lithium ion batteries has increased enormously. There is even talk now of Tesla and a Chinese company developing a battery that can last for one million miles. This would be a highly significant development. The greater the lifetime of a battery, the lower its cost per mile and the less environmental damage the manufacturing process creates over the life of that battery.

Covid-19

The short term impact of Covid-19 and associated lockdowns on the car industry is obvious.

But post-Covid, I don’t expect things to go back to normal. Businesses have tried remote working, they have tried meeting by Zoom, and it isn’t so bad. Remote working will continue. The Zoom economy is here to stay.

This will hit travel — people won’t spend so much time or money on commuting or attending business meetings.

This will hit the automobile industry.

Autonomous cars

Autonomous cars will have an even greater disruptive effect on the car industry.

The point about autonomous cars is that their ascendence won’t be gradual. At the moment, the technology isn’t quite good enough. One day, and I suspect that day will be in the first half of this decade, it will emerge that autonomous cars are safer than cars driven by people. At that precise moment, demand for autonomous cars will soar. Soon afterwards, regulators will step in and, in no time, cars driven by people will become as popular as a horse and cart.

Linked to autonomous cars will be the sharing economy. Taxis will become much cheaper because there will be no need to pay a driver. The cost per mile will also be cheaper than at present, because electric cars have less living parts than traditional cars. As battery costs continue to tumble, the costs of ordering an autonomous car when you need it will fall and this cost will become so low that people will stop buying them, we will see transport as a service (TaaS) instead.

If we see the convergence of autonomous cars and the sharing economy — you could call it the Uber economy — consider how car manufacturing will be hit. Cars spend 95% of their time parked. Assuming some periods of peak demand, I estimate our transport needs will be met with around 20% of the current car fleet. Imagine the implications of that!

Innovator’s dilemma

The late Harvard professor, Clayton Christensen developed the innovator’s dilemma theory. I have written about this many times before. This article provides an outline. 

I believe that the for companies operating in automobiles and parts the above conditions represent a massive challenge.

Some may flourish, however, the types of organisations that I expect to do well fall into certain categories. They have learned the lesson of innovator’s dilemma and are applying these lessons. Or perhaps they operate in a niche that makes them immune from these changes, or maybe they are themselves a disruptor.

I have long been a Tesla fan because it is a classic example of a disruptor in the tale of innovator’s dilemma. It leads the global automobile industry because of its expertise in lithium ion batteries and AI.

If you had bought into Tesla on March 23rd when I said their shares could be the bargain of the century, you would have almost trebled your money.

Let me add one more point. Many of the companies listed as falling into this sector are more parts than automobiles. Given what I said above about the threats to the automobile sector, this may be no bad thing.

But let’s take a look at the UK and see whether there are any companies in the automobile or parts business that tick one of my four boxes.

  • They have learned the lesson of innovator’s dilemma
  • They operate in a niche such that they will be immune from the disruptive effects I describe
  • They are themselves a disruptor.
  • They operate in a niche away from automobiles.

So, in alphabetical order, let’s take a look.

Avon Rubber

The Avon Rubber share price history tells a remarkable story. If you had invested a year ago you would have doubled your money. If you had invested five years ago you would have almost quadrupled your money and if you had invested ten-years ago your would have increased your money 30-fold.

Alas, if you had invested right at the beginning in 1998, you would have not done so well as an investor who jumped on board in 2010. You would have quadruped your money — but that is still a good performance.

Not surprisingly, with growth like that it has a whopping P/E — 72.

Here is one problem — I am not sure why it is classified as automobiles/parts. It produces life critical personal protection systems, and milking point solutions.

It provides, among other products, helmets, body armour, respirators and powered air and It is not hard to see why it has performed well during the Covid crisis.

It doesn’t have much to do with automobiles— maybe that’s a positive.

Period Share price (approx)
Current share price 2,980p
Year high 3,360p (beginning of June)
Year low 2,050p (March)
12-month high 3,360p
All time high 3,360p
Share price five years ago 800p
Share price ten years ago 97p
Share price 1998 668p

Inspirit Energy

Here is another company sitting in the automobile and parts sector which doesn’t have much to do with automobiles. It provides parts, in its case combined heat and power boilers. It is very much heavily engaged in what I would call 'new energy'. Inspirit Energy says that it is “positioned to become a key product in the transition from centralised power generation to low carbon distributed energy.”

Is this a market with a future? Absolutely.

But this is a small company. Last year it raised £300,000 and has been on the acquisition trail. I like the concept behind the business, but an investment in the company would be high risk.

Period Share price (approx)
Current share price 0.043p
Year high 0.07p
Year low 0.02p
12-month high 0.22p (November)
All time high 2.82p (2013)
Share price at IPO 1.23p (July)

Iqgeo Group

Iqgeo Group sells “end-to-end geospatial software which improves productivity and collaboration across enterprise planning, design, construction, maintenance and sales processes for telecoms and utility network operators.”

The company is big in digital transformation— which is a good area to be in. It produces the kind of software that will be in demand post-Covid.

But with a market cap of £31million. This is a small company. For that reason an investment would be high risk.

Period Share price (approx)
Current share price 61.25p
Year high 66p
Year low 57.50p (January)
12-month high 66p
All time high 68p (2018)
Share price at IPO 68p (December 2018)

Marshall Motor Holdings

With a P/E ratio of six, Marshall Motor Holdings appears cheap.

It is the seventh largest motor dealer group in the UK and the company operates in 28 countries.

Before the lockdown it was performing well, but I don’t see any of the ticked boxes that I said I was looking for above.

Period Share price (approx)
Current share price 124.50p
Year high 154p
Year low 87p (April)
12-month high 167p (June 2019)
All time high 186p (2015)
Share price at IPO 161p (2015)

Proton Power Motor Systems

When the share price soared earlier this month, people took notice, including the company itself. It said it was “not aware of any material reason" for the surge.

The company “designs, develops, manufactures and tests fuel cells and fuel cell hybrid systems, as well as the related technical components.”

Really, despite having the word ‘motor’ in its name, it is more of a green energy company.

The company has been getting new orders in this year — and says its ability to fulfil orders has been unaffected by Covid

It is an interesting company, but I wonder about fuel cells which are more geared towards hydrogen gas. If this market takes off, Proton Power Motor Systems is well placed

Period Share price (approx)
Current share price 69.55p
Year high 74p (early June)
Year low 23p (January and March)
12-month high 74p
All time high 89.50p (2006)
Share price at IPO 89.50p (2006)

Transense Technologies

Transense Technologies is in the technologies business— it provides products designed to reduce operational costs.

Among its technologies are products designed to increase efficiency of car engines and power grids.

The company is also into the Bulk Acoustic Wave Delay Line Market. A recent report predicted ‘incredible growth’ for this market.

Last month it agreed a deal with Bridgestone to supply its iTrack system as a mining tyre monitoring system.

Transense Technologies has interesting products and speciality, but as is the case with many firms mentioned above, it is small with a market cap of £12.6 million. Investing in the firm is for that reason quite risky — do a lot of research, first.

Period Share price (approx)
Current share price 77.50p
Year high 77.50p
Year low 42.50p
12-month high 88.50p (December 2019)
All time high 19,000p (2000)
Share price at IPO 3,200p (1998)

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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