Financial analysis: Faster electrification would boost automaker stocks and profits

Stopping sales of combustion engines sooner is better for the car industry and European car jobs.

Originally published on Transport & Environment.

According to a financial analysis of six automakers, automakers are expected to increase their market value and profit margins by switching to electric vehicles faster than they currently expect. It reveals that automakers would add 800 billion euros to their stock value if they made a faster transition¹ this decade instead of clinging to their combustion engine business model. The findings run counter to the industry narrative that Europe’s drive to sell only zero-emission cars in 2035 would hurt profitability and cost jobs.

Automakers face the prospect of falling combustion engine profits in the late 2020s as competition from cheaper battery-electric vehicles and tighter regulations hit sales and cut into fuel economy. ladder. To model their cash flow going forward, research house Profundo looked at the six automakers’ financial numbers and separated each’s electric vehicle and combustion engine businesses into two separate companies. The analysis finds:

  • The operating profit margins of electric vehicle companies are expected to exceed those of combustion engine manufacturers in 3 to 5 years.
  • Towards the end of the 2020s, engine manufacturers’ profit margins are expected to decline and even turn negative on balance sheets.

Luca Bonaccorsi, director of sustainable finance at Transport & Environment (T&E), which commissioned the research, said: “Opting for a slow phase-out of combustion engines is financial suicide for automakers. The slow transition destroys shareholder value and puts entire companies in danger of disappearing. The only transition that makes business sense is fast and furious. »

Falling profits on combustion engines will deter investors from companies that are slow to electrify. Profundo used a standard “Sum Of The Parts” methodology to assess the market value each automaker could achieve in fast and slow electrification scenarios. His model shows:

  • The valuation of the six automakers could increase by an average of 316% from today by going electric faster between 2025 and 2030 than their current plans.
  • A slower-than-expected EV transition in these years would lead to the weakest market value growth and could even lower the valuation of Toyota – one of the slowest automakers to electrify so far – by compared to today.

Consumer carmaker Volkswagen could increase its market value by more than three times (253%) and Stellantis almost by five times (388%) compared to today if it goes electric faster than expected, according to the to analyse. Toyota, which is slow to electrify, has a lower growth potential (70%).

In the premium market, the opportunities are even greater: Mercedes-Benz could add 471% to its value over 10 years, and BMW could be in line to gain 472%. Even Volvo Cars, which is currently valued twice as generously by the market as others due to its lead in electrification, would need to rise 245% if it were to go faster.

In Europe, EU clean car rules are the main driver of electrification. The current proposal to make the standards more ambitious would require little progress until 2030. But Profundo research shows that 2030 will be too late to make the switch if European automakers are to avoid financial hardship – with potentially disastrous consequences for car manufacturers. automotive industry jobs.

Julia Poliscanova, Senior Director of Electric Vehicles and Mobility at T&E, said: “A faster transition to electric is not only in the climate and consumer interest, it is vital for the financial sustainability of European car manufacturers. EU lawmakers have an obligation to these companies and workers to support a rapid transition. Higher car CO2 standards than those currently on the table for 2025 and 2030 are essential to speed it up.


¹ Three steps were followed in this analysis. First, Profundo analyzed each company’s publicly available financial figures and strategic plans. Second, he modeled each company’s cash flows by separating the EV and combustion engine entities into two separate businesses. It used a “Discounted Cash Flow” methodology to assess operating margins, earnings and overall free cash flow for each business. Third, Profundo used a “Sum Of The Parts” valuation methodology to assess the theoretical market value each company could achieve under three scenarios: slow, baseline, and fast EV transition.

The base case reflects the current strategies of car manufacturers. The fast scenario is based on each automaker transitioning to electric car and light truck sales in 2025-2030 faster than their current plans, reaching 100% in 2035. The slow scenario is based on each automaker automobile only realizes about half of its planned electric vehicle. share of sales in 2025-2030.


 


 

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Sarah J. Greer