Making Hay Monday – November 18th, 2024
Making Hay Monday
High-level macro-market insights, actionable economic forecasts, and plenty of friendly candor to give you a fighting chance in the day’s financial fray.
Kemp
The growth in registered motor vehicles sales in India since 1980 has been truly astonishing. Perhaps even more remarkable has been the fact that two-wheel vehicles — essentially, motorcycles and mopeds — on the road over there have produced the majority of the increase. That may be on the cusp of changing as India grows richer, and the ranks of its middle class swell; cars are almost certain to be the preferred personal transportation choice of the future. Presently, there are about 500,000,000 Indians who are considered middle class, though most are apparently in the lower echelon of that category. By 2030, approximately one billion citizens of India are projected to qualify for middle-class designation. Because of its unreliable power grid, combined with the difficulty of charging EVs, particularly for apartment dwellers, most autos sold there over the balance of this decade are likely to be powered by either internal combustion engines (ICEs) or a combination of ICEs and relatively small batteries — in other words, hybrids.
Financial Times, Overton
Conventional nuclear plants, per the above visual, are the familiar large-scale design, typically providing about one gigawatt (one billion watts) of power. That’s enough to support the power needs of a U.S. city with about 500,000 occupants. Unfortunately, despite America’s acute need for a dramatic increase in electricity output, there isn’t a single large nuclear plant under construction or even planned. The USA looks a lot better when considering small modular reactors (SMRs) often in the 10- to 100-megawatt capacity range. (The largest is a 300 MW project and, amazingly, one has been permitted in the U.S.; most are being built in other countries.)
The problem is that the technology, while extremely promising, remains unproven. Moreover, the regulatory path is excruciating, requiring many years to achieve Nuclear Regulatory Commission (NRC) approval, as well as that of other governmental agencies. However, it is quite possible, even probable, that President-elect Trump will make it a high priority to streamline and accelerate the approval process for traditional nuclear plants as well as SMRs.
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Evergreen Compatibility Survey
“Sanctioning 40% of world palladium production with the market in a deficit is something only a Western policymaker could think would work.” -Trader Ferg
A Tale of Two Companies
Power-Punchers
Automaking is a notoriously brutal business. Capital spending is high, labor relations are prickly, consumer tastes are fickle, government regulations are onerous, profit margins are often miserly, cyclicality is simply a fact of life, and overcapacity is chronic. Other than that, what’s not to like?
As a result of the foregoing, and myriad other negatives, carmakers usually sell at miniscule P/E ratios. In some cases, the multiple can be as low as three times annual earnings.
Making matters worse, not that they need to be, Western governments have put enormous pressure on the industry to shift its output to electric vehicles (EVs) where profit margins are often negative. In other words, losses are the norm for EV producers. Ford, for example, disclosed that in 2023 it lost $40,000 on each EV it sells. It’s tough to make that up with volume.
As we all know, there is one electrifying exception to the industry’s travails and its related meager valuations. That company would, of course, be Tesla (TSLA) and its trillion-dollar market capitalization. Just since the election, it’s increased by about $250 billion. That gain was about 2½ times thecombined market value of Ford and GM. After the post-election spike, TSLA now sports a P/E of roughly 100 based on Wall Street projections for 2025. That’s just a little higher than the single-digit multiple afforded to most of its rivals.
Its enormous market value is due in no small part to its CEO, the hyper-talented Elon Musk. His close relationship to President-elect Trump obviously doesn’t hurt. Part of the magic he has imparted on TSLA is due to the always allusive, but tantalizingly imminent (at least according to his utterances) promise of FSD — Full Self-Driving cars. The profitability windfall for TSLA from FSD is supposed to flow from the rollout of Robotaxis and the almost limitless market they would open up.
Maybe that makes sense and it’s hard to discount someone who has achieved unparalleled success in the rocket and satellite launching business. This includes the even more challenging feat of recapturing used rockets. With a complete absence of sarcasm — rare for this newsletter, at least when it comes to both TSLA and most elected officials — what he has done with SpaceX is beyond stellar.
Consequently, perhaps his FSD and robotaxi plan for TSLA will justify its immense valuation. TSLA bulls are throwing out price targets that are multiples of $1 trillion based on what they feel is almost limitless potential. One aspect in his favor is the challenges currently faced by the hybrid — more on that term in a bit — version. This refers to the so-called Level 2 iteration, blending partial self-driving with what should be human involvement — “should be” as the key phrase.
Per the Financial Times’ Sarah O’Connor in a November 11th article aptly titled, The very human problem with not-quite-self driving cars, the fly in the ointment is a condition called “automation complacency”.
FT
This is where the flesh-and-blood co-driver is lulled into believing that the FSD future has arrived and he or she essentially zones out. Here’s a relevant quote from her piece: “Studies of various partial automation systems have found drivers become increasingly likely to disengage the longer they use them.”
A Volvo study of its own employees on a test track monitored a distraction alert system to see how well it functioned at keeping the driver engaged. You be the judge:
…almost 30% of them allowed the car to crash straight into an object in the road. In follow up interviews, the drivers said they saw the object coming, but they trusted the car to deal with it, at least until it was too late.
Thus, maybe the hybrid approach is destined to fail, thanks to automation complacency, and the best hope is a leap straight into FSD. However, the fact that the car did not correct course to avoid a crash is not very encouraging for the FSD panacea.
For TSLA specifically, the other ominous consideration is that Google’s Waymo and numerous Chinese automakers appear to be well ahead of Mr. Musk’s company when it comes to autonomous vehicles. But perhaps he can catch up and then surpass them. That’s certainly what TSLA’s trillion-dollar valuation is assuming, as are those even more heroic price targets.
The other company, relevant to this week’s actionable investment idea, is China’s BYD. Its market cap is around $110 billion in U.S. dollars. It trades for about 22 times this year’s earnings estimate and just under 17 times the 2025 projection. While TSLA’s revenues are forecast to be a mere 5½% higher than in 2023, despite being pumped up by selling tax credits to other EV producers (and, ironically, those may soon be eliminated by the Trump administration), BYD’s sales are anticipated to vault by 24%. However, it’s what is driving (even if not of the “self” kind) such remarkable revenue increase that is the essence of this Making Hay Monday.
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This material has been distributed solely for informational and educational purposes only and is not a solicitation or an offer to buy any security or to participate in any trading strategy. All material presented is compiled from sources believed to be reliable, but accuracy, adequacy, or completeness cannot be guaranteed, and David Hay makes no representation as to its accuracy, adequacy, or completeness.
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