Auto Hybrids Are Great: But What's Next?
James is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There is no shortage of visionaries when it comes to the automobile industry. However, it's rare that a revolutionary technology really takes hold in a very big way. It's been well over a decade since our last major revolution, being hybrid technology.
It would be short-sighted to suggest that hybrid technology is the pinnacle of automobile development. So with that in mind let's take a look at two companies offering promising disruptive technologies and one complimentary company poised to grow no matter the outcome.
First an important note on why disruptive technologies present such great opportunities. There are many things that make companies successful, but when you get right down to it operating margins and products are really what drive a company forward. Great products are always appreciated but a disruptive product can steal massive amounts of market share. For a recent example of disruptive products stealing market share, think of smart phone and tablet development that we've seen over the last decade and how it benefited a certain company.
Tesla (NASDAQ: TSLA) is a domestic auto manufacturer based in California. Recently they were the recipient of yet another award, Motor Trend's 2013 Car of the Year Award for the Tesla Model S. Motor Trend wrote "For the first time since anyone can remember, this year's winner was a unanimous choice. Not a single judge had any doubts about the 2013 Motor Trend Car of the Year." High praise from a magazine that normally appreciates the roaring V-8's. But then again how many stock V-8's can go from 0-60 in only 4.4 seconds.
While the price tag may be a bit daunting, starting at close to $60,000, the all electric vehicle promises to make you Mother Nature's best friend and the envy of every car enthusiast in your neighborhood. But you might have to get your order in soon since the 2013 production numbers are only going to number 20,000. However, this is a huge increase from the 2012 production numbers of around 3,000.
Distribution centers have been opening all over the world from the Netherlands, to Canada, to Hong Kong most recently. As a result of this increased exposure, demand for the luxury electric vehicle has been increasing as more people see the silent sport coupes gliding effortlessly through the morning commute with cat-like agility.
Plans for an all electric SUV are underway, known as the Model X, and target dates of 2014 have been set for the release. This sporty SUV promises the same eco-friendliness, far more room, and still will hit 0-60 in under 5 seconds. On a side note the "falcon doors" are a great addition promising to give the occupants maximum entry and exit room in the narrowest of spaces.
Another point of interest is their CEO, Elon Musk, who also co-founded Pay Pal. This visionary is also responsible for the ambitious nature of Space X which is a leading pioneer in private space flight/exploration. Elon is not just the CEO of Tesla but the product's architect as well. Tesla is the realization of a personal dream Elon has held for over two-decades. It would be difficult to find a more genius businessman/engineer/physicist that is dedicated to a company's future.
Conclusion: Tesla has so much potential to be a true game changer in the automobile industry as it Increases production and its customer base. It has and should continue to receive awards galore from numerous auto and consumer publications. Finally, it offers a very attractive product that aims to change the fundamental nature of how we power vehicles.
Electric vehicles have been part of the alternative auto development craze for many years and most of the public is well aware of their existence. But the next technology I am about to review is not as widely known and yet could have far more potential, especially in commercial transportation. This is due to the copious amounts of natural gas at cheap prices and the existence of clean diesel technology.
Sasol (NYSE: SSL) is a truly integrated energy company with interests in oil, gas, coal, and pipelines. Just the fundamentals alone are enough for me to recommend this company to the long term dividend investor. However, I believe there is great promise in one of Sasol's technologies that has been largely ignored by the investment community. I am writing of course about the Gas to Liquids (GTL) technology.
GTL technology is fairly complicated so I'll thank Sasol for the following brief description taken from their GTL Technology web page:
Stage 1: Reforming natural gas with oxygen and steam over a nickel catalyst to form Syngas.
Stage 2: Converting Syngas into long-chain waxy hydrocarbons in a Sasol Slurry Phase Distillate Fischer-Tropsch (FT) reactor.
Stage 3: Selectively cracking the waxy hydrocarbons to produce GTL diesel, GTL kerosene, GTL Naphtha and LNG.
Sasol claims this process enjoys significant cost advantages which of course helps margins. These cost efficiencies continue to improve over time. With plans to develop this technology on a much larger global scale we could see GTL beginning to power local diesel vehicles in the coming years. This could mean decreasing prices for diesel fuel over the long run.
On the domestic front Sasol is looking into establishing GTL plants in North America. Specifically, Louisiana, which could mean hundreds of well paying positions here at home. Alberta, Canada is also on a short list of other potential sites for GTL plants.
Even without the prospect of revolutionizing how natural gas is utilized Sasol presents a great value investment with a solid yield of around 4.5%. A P/E of 9.5 and a Forward P/E of 8.3 are just the starting point for financial highlights. How does a year over year revenue increase of 14.5% sound? Now put a 13.92% profit margin and a 22.43% operating margin into the mix and things look pretty good.
Conclusion: Though I am not yet putting this on my buy list, though I am tempted, I will be observing Sasol very closely for signs of increasing profitability due to GTL. Once large scale increases are reflected in two consecutive quarterly reports then I would be more confident about buying in for potential long term gains. Therefore, Sasol is going on my watch list for now with the expectation for a buy rating in the future.
As noted earlier, the USA is currently in the initial stages of tapping its vast natural gas deposits. If Sasol's technology produces a real price decrease in diesel or if natural gas vehicle use increases Cummins (NYSE: CMI), a personal favorite is poised to benefit. Looking at My Caps page one can see it's one of only a handful of my "top picks".
While this company isn't really in the disruptive category it would stand to benefit from any sort of increased use of natural gas or diesel engines in either the commercial or residential auto sector.
Is that speculation enough to buy this company? No-but the fundamentals, management, products, and growth certainly do justify getting in for the long term.
It's rare that you find a company with so many wonderful attributes. Here are just a few highlights.
Management: A great management team focusing on increasing the customer base, global growth, re-investment, and improving margins.
Products: a top quality product that will be demanded for decades to come. On top of engines they make power generation systems that are indispensable in many industries. Besides the manufacturing of products they are also the top servicer of those same products to the tune of about 30% of their total revenue---that's dependable recurring revenue.
Growth: A fast growing global company. One of the first western companies to gain a foothold in China decades ago Cummins could be positioned to play a China recovery better than anyone. Before it was popular Cummins was also focused on the developing countries. Look for rebounds in any of these regions to have a positive impact on Cummins top line. With upwards of 60% of it's sales now coming from outside the USA this is truly a global growth play.
Conclusion: There are so many great things about Cummins. Therefore, I'm giving them my highest rating. Strong Buy and Long Term Hold.
It's not a question of if a new technology will come to dominate a certain aspect of the market but rather when will that shift occur and with what technology. Tesla's electric vehicle platform offers a real significant shift that consumers could begin trending toward in the coming years. I further believe that natural gas engines and diesel engines will continue to dominate the commercial market, which will benefit Cummins. Finally, the most efficient diesel producers will obviously maintain advantages in margins and this points to Sasol with their GTL technology.
Lulupoopsalot has no position in any stocks mentioned. The Motley Fool recommends Cummins, Sasol, and Tesla Motors . The Motley Fool owns shares of Cummins and Tesla Motors . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!