Archives for April 9, 2018

Well that didn’t take long. During Q1, Tesla’s (NASDAQ: TSLA) Model 3 deliveries surged past General Motors’ (NYSE: GM) all-electric Bolt in the U.S., highlighting Tesla’s far more ambitious plans for its most affordable electric vehicle yet.

Sure, Tesla’s production ramp up for its Model 3 is running behind schedule. But it still only took about nine months for Tesla to go from its first 30 Model 3 deliveries last summer to a production rate of 2,000 units per week. Meanwhile, GM’s Bolt production doesn’t appear to be coming even close to this rate, despite GM’s head start over Tesla’s Model 3.

Bolt deliveries

The Bolt had a solid first year in 2017, with about 26,000 deliveries globally. But the electric car is far from a high-volume, mass-market vehicle. For perspective, Tesla’s Model S — a vehicle that starts at $75,000 and targets the niche, high-end luxury segment — dwarfed Bolt deliveries last year. Tesla delivered nearly 55,000 Model S in 2017. Even the automaker’s Model X SUV saw deliveries of 47,000 units last year.

The Bolt’s comparatively low delivery volume is even more pronounced recently, as U.S. Bolt deliveries declined 51% sequentially in Q1. Year to date, U.S. Bolt deliveries are just 4,375 units.

In the meantime, quarterly Model 3 deliveries in the U.S. have surged to over 8,000 units. Further, Tesla’s current weekly production rate for Model 3 extrapolates to a quarterly run rate of about 26,000 Model 3s per quarter.

This is only the tip of the iceberg for Tesla

Though Tesla is behind its initial production targets for Model 3, the company’s progress is still impressive. As Tesla said in its first-quarter update on vehicle deliveries and production, the Model 3’s production is increasing at a much faster rate than production for Tesla’s Model S and X.

“In the past seven days, Tesla produced 2,020 Model 3 vehicles,” Tesla noted in its April 3 update. The company continued:

In the next seven days, we expect to produce 2,000 Model S and X vehicles and 2,000 Model 3 vehicles. It is a testament to the ability of the Tesla production team that Model 3 volume now exceeds Model S and Model X combined. What took our team five years for S/X, took only nine months for Model 3.

Importantly, Tesla pulled this off with an initial customer satisfaction score for Model 3 quality of above 93% — Tesla’s highest rating for any product ever.

Yet Model 3 production and deliveries are about to rise much higher, according to Tesla management. The company said it expects to achieve a weekly production rate for Model 3 of 5,000 units per week in about three months, “laying the groundwork for Q3 to have the long-sought ideal combination of high volume, good gross margin and strong positive operating cash flow,” management explained.

Even more, after Tesla hits its 5,000 units per week milestone, management intends to begin adding enough capacity to get to a production rate of 10,000 Model 3s per week, setting Tesla up to deliver over 500,000 Model 3s annually.

GM may have been first to market with a sub-$40,000 all-electric vehicle sporting over 200 miles of driving range, but Tesla looks poised to solidify its position as the first company to bring to market a similarly priced, high-volume all-electric car.

Ford Motor Company (NYSE: F) said on Friday that it will recall about 347,000 2018 model-year pickups and SUVs to fix a transmission problem that could cause the vehicle to roll away when the transmission is in park.

That sounds like a big deal, doesn’t it? If you own one of the affected vehicles, it is a big deal — in the sense that you’d best get it fixed. (It won’t cost you anything except some time.)

But for investors in automakers, not every recall is a big deal. Some are very important because they can have a significant impact on the company’s bottom line or stock price. But many aren’t — even if the defect sounds serious, it may be no big deal in terms of its impact.

How do you tell the difference? I’m glad you asked.

Ford said that it’s recalling 347,000 vehicles, including some 2018 F-150 pickups, for a defect that could cause parked vehicles to roll away. Image source: Ford Motor Company.

Why automotive recalls happen

First, some background. Automakers issue recalls when they learn of a defect that could be dangerous, that could cause the vehicle to behave in illegal ways, or both. “Defect” here is a technical term: It can mean anything from a part that was installed incorrectly on a few cars to a significant design flaw affecting millions of vehicles. Automakers are obliged to repair such defects at no cost to consumers; that’s when a recall is issued.

Often, the danger is hypothetical: There haven’t been any accidents or injuries as a result, but the automaker (or regulators or both) are concerned that there could be, and so a repair is needed.

But sometimes, the danger isn’t just hypothetical. There may have been accidents, injuries, or even deaths that happened as a result of the defect. Or it may be clear from testing that the car does something illegal under certain circumstances, such as emitting more pollution than is allowed by law.

Either way, while most recalls aren’t serious, it’s important to remember that every automaker issues them from time to time. Even Tesla (NASDAQ: TSLA) and Ferrari (NYSE: RACE) have had recalls, and both will almost certainly have more.

How to tell when a recall is a big deal

Auto investors should pay close attention to recalls when there’s a significant chance that the recall will affect the bottom line, the company’s stock price, or both. Generally speaking, there’s a significant financial risk to the automaker when one or more of these things are true:

• There are known instances in which the defect led to injuries or deaths, or it becomes clear that the defect endangered many people.
• The defect is expensive to repair, requiring new parts, several hours of work by mechanics, or both.
• There are lots of vehicles (think millions) with the defect.
• The company knew about the defect for a long time before it was disclosed.

It’s always a big deal when there are injuries or deaths, of course. That’s not only because of direct concern for the people affected, but because the automaker could suffer lingering damage to its reputation (and its sales) if the situation isn’t handled very, very carefully.

Even if it’s handled carefully, such a situation might still be costly: General Motors (NYSE: GM) spent roughly $4 billion to deal with its 2014 ignition-switch scandal. But CEO Mary Barra showed concern for victims, accepted responsibility, didn’t contest criminal penalties, and went above and beyond in recalling vehicles that had any chance of being affected. Her response successfully limited the long-term damage to GM’s reputation. The bill was steep, and the company’s sales (and its stock price) took hits, but recovered.

It’s also a big deal if the defect is expensive to repair. Last year, Ford recalled 440,000 vehicles for door-latch and engine-cooling problems. That’s not a huge number of vehicles as recalls go, but both defects required Ford to have new parts made and shipped to dealers and to pay the dealers for complicated, time-intensive repairs. The total cost was $295 million, a non-trivial dent in Ford’s quarterly bottom line.

Even if the defect is fairly minor and inexpensive to fix, a recall can be a big deal if there are several million vehicles affected — simply because several million people will hear about it and may not be happy. And of course, it’s never good for a company’s reputation or sales if it’s revealed that the company knew about the defect for a long time before taking action.

The perfect recall storm: VW’s diesel scandal

Imagine a defect that created a significant public-health hazard, was very expensive to repair, and affected millions of vehicles all over the world. In addition, the company knew it about and concealed it for years. Not only might that company get socked with a huge bill for the repairs, but it also might find itself facing huge lawsuits, damaging adverse publicity, and even criminal charges.

You don’t have to imagine it: That’s what happened to Volkswagen AG (NASDAQOTH: VLKAY) in the wake of revelations that millions of its vehicles had been programmed to cheat on emissions testing, including about 500,000 in the U.S. The revelations — which were made by U.S. regulators, not by VW itself — led to a perfect recall storm:

• The toxic emissions were a clear public-health hazard and in flagrant violation of the U.S. Clean Air Act, which strictly regulates emissions of oxides of nitrogen. These oxides cause smog and acid rain and are especially plentiful with diesel engines. (Other countries regulate them less strictly.)
• The repairs required to bring the vehicles into compliance with U.S. laws were so expensive that VW ended up buying most of them back.
• While VW suffered the worst consequences in the U.S., where laws regulating diesel emissions are very strict, it also faced and continues to face investigations and legal consequences in several other countries, including Germany.
• Not only did VW know about the defect, it had deliberately designed the vehicles to cheat.
  The upshot: Since that first revelation in September of 2015, the mess has cost VW about $30 billion, and there still may be more charges to come. And investors, take note: VW’s stock price still hasn’t recovered.

VLKAY data by YCharts.

Is Ford’s latest recall a big deal?

Now, let’s go back to the beginning: Is Ford’s latest recall a big deal? Let’s run down our four points:

• Injuries or deaths? Ford said that it’s aware of one accident and injury related to the defect.
• Expensive to fix? The defect isn’t a design flaw, it’s an assembly error: A clip on the vehicle’s transmission-gear-shift cable might have been installed incorrectly at the factory. The repair is simple and doesn’t require new parts to be made.
• Lots of vehicles? The affected models include Ford’s best-selling F-Series pickups, but the numbers aren’t huge: About 347,000.
• Did Ford hide the defect? On the contrary: Given that the affected vehicles are all 2018 model-year F-Series trucks and Expedition SUVs, it looks like Ford reacted promptly after discovering the problem.

Long story short: It’s a big deal for the person who was injured, and we shouldn’t trivialize that. But in terms of the impact on Ford’s bottom line or stock price, this recall doesn’t look like a big deal as of now.

The first quarter wasn’t pretty for the Dow Jones Industrials (DJINDICES: ^DJI). The average posted a loss for the first time in nine quarters, losing more than 600 points in turbulent trading that marked the return of volatility to the stock market.

Out of the Dow’s 30 stocks, 21 lost ground during the first quarter, helping to explain the 2.5% drop in the average. Yet three stocks in particular were the biggest decliners in the Dow during the period, each falling more than 10% and underperforming the overall average dramatically. None of the three names comes as a huge surprise to investors who’ve followed the Dow lately, but continued woes raise questions about their likelihood of rebounding in the future.

The worst 3 Dow stocks in the first quarter of 2018

Stock                                                                    Total Return

General Electric (NYSE: GE)                               (22.1%)

Procter & Gamble (NYSE: PG)                            (13.1%)

DowDuPont (NYSE: DWDP)                               (10.1%)

Data source: Yahoo! Finance.

Power off for GE

General Electric was by far the worst performer in the Dow in 2017, and many value investors had hoped to see a rebound for the conglomerate at the beginning of this year. Yet that didn’t come to pass, as investors failed to see a strong response from GE management in plotting a pathway forward to bounce back from its past challenges.

Investors were already prepared coming into 2018 for several of General Electric’s key businesses, including power and oil services, to remain weak. But the quarter’s earnings report revealed an unexpected problem in the form of a $6.2 billion after-tax charge because of the conglomerate’s portfolio of insurance exposure that it had retained after its divestiture of major financial assets. With ongoing potential issues that the conglomerate is still facing, GE hasn’t yet shown signs of stabilizing, let alone clawing its way back to success.

Image source: Procter & Gamble.

P&G plods along

Consumer giants are supposed to be good places for conservative investors to put money during tough markets, and Procter & Gamble’s manifold billion-dollar brands have been a stalwart in the consumer products industry for decades. Yet growth has been hard to come by, and P&G’s quarterly results during the period were no different, sporting sales gains of just 3% and relatively flat earnings after taking one-time factors into account.

Retaining market share has been a problem for P&G, and a lot depends on what impact activist investor Nelson Peltz has on the company as he takes his spot on its board of directors. Focusing on the consumer giant’s most popular products could be a winning strategy for Procter & Gamble, but some believe more dramatic strategic moves could be necessary in order for the stock to behave the way shareholders would like to see.

DowDuPont’s chemistry

Finally, DowDuPont also posted significant losses, and of these three stocks, it’s the one that’s most in limbo at the moment. The company has completed the merger of Dow Chemical and DuPont, but it is now looking forward to its future breakup into three components. One company will be responsible for manufacturing basic chemicals and polymers in the materials science area. A second will hold the merged company’s specialty products lines in the aerospace, semiconductor, biosciences, and occupational safety arenas. The last will get the seeds, genomics, and other agricultural assets from Dow and DuPont.

The split-up isn’t likely to happen until 2019, which will leave investors in DowDuPont facing an imminent breakup without being able to make forward progress. That’s not bad for those who believe in the prospects for all three businesses, but for those who’d prefer to pick one over the others, the waiting will make the stock less attractive.

What’s next for the Dow?

Many expect the Dow to bounce back in the rest of 2018, as it has in many past years. To do so, investors would prefer to see better performance from laggards like DowDuPont, Procter & Gamble, and General Electric, as that would indicate shifting conditions that could be more favorable for the stock market as a whole.

Owning a stock for a decade or more may seem like a long time, but it’s actually the best way to generate market-beating returns in the long term. And if you buy the right stock, you can generate incredible returns without doing a thing.

Today, I think investors should be looking at Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL), NextEra Energy Partners (NYSE: NEP), and Apple (NASDAQ: AAPL) as great buy-and-hold investments. Each has their own competitive advantage and has a business that’s built to last.

Image source: Getty Images.

Alphabet

Alphabet’s Google is central to the internet for millions of people (myself included), and the company has built an insanely profitable business on the search engine at its foundation. The company uses data from everything from our search history to emails to deliver relevant ads and has built a massive advertising business on that. I think search and Google will continue to grow, but the other businesses in Alphabet are what make this a long-term winner.

Alphabet’s investments in new businesses will keep it relevant for decades to come. Waymo is a leader in self-driving vehicles, Google Fiber is a leading high-speed internet provider, and Calico is developing health and well-being solutions. These are on top of equity investments Alphabet has in Slack, Airbnb, Uber, Lyft, Stripe, and many more. Even if Alphabet’s core business begins to fade — which we see no sign of today — the investments in strong businesses both within and outside of Alphabet will make this company a great stock for years to come.

NextEra Energy Partners

If you’re not familiar with renewable energy yieldcos, NextEra Energy Partners is a company worth looking into. It owns 3.7 gigawatts (GW) of renewable energy assets that have contracts to sell electricity to utilities with an average of 18 years remaining.

What’s great about renewable energy projects is they act like bonds for a yieldco buying them. NextEra Energy has a strong track record of buying projects that are accretive, or grow the dividend over the long term, to the current $1.54 per share dividend, which yields 3.8%. Plus, the low dividend actually makes it easier for NextEra Energy Partners to acquire projects using a combination of newly issued debt and equity because a low dividend yield makes its cost of capital lower than competitors’.

There aren’t many successful yieldcos in the market today, but NextEra Energy Partners has been a winner because it’s backed by a big utility (NextEra Energy), it has a large pipeline of projects that can be dropped down from the utility, and it has a low dividend yield that makes accretive acquisitions possible. That’s a recipe for success in energy today.

Apple

There’s never been a cash machine quite like Apple. In the past year alone, the company generated $52.3 billion in free cash flow, and that flow of cash doesn’t show any signs of slowing. The iPhone drives the bulk of the company’s business and there are now hundreds of millions of the smartphones in circulation, but other Apple products — from Macs to iPads to AirPods — play a role in Apple’s business, too.

The Apple ecosystem is really something no company can match today and it’s locked hundreds of millions of consumers around the world into Apple products. Once you’re within it, it’s easy to add more and more products, eventually adding services like Apple Music, iCloud storage, and soon streaming TV, as well.

Apple’s incredible products and resulting cash flow are great, but let’s not forget about its net cash balance of $181.2 billion. That’s a balance sheet that can withstand any market turbulence or competitive pressure in tech. Apple is built to last for the long term.

Building a long-term portfolio

The market can be volatile and unsettling at times, but Alphabet, NextEra Energy Partners, and Apple are all built to withstand turbulence. They’re stocks I would be comfortable owning for a decade or more.