FUJHF - Tesla Toyota And Subaru: If You Could Buy Only One

2023-11-20 10:30:16 ET

Summary

• Toyota Motor Corporation sold more cars in 6 months than Tesla, Inc. has sold since its inception in 2008.
• Subaru Corporation is one of the fastest-growing car brands in the U.S., with a 15.3% YoY increase in sales.
• Tesla's stock performance has been strong, but its future success depends on differentiation and maintaining its reputation for engineering and manufacturing excellence.

Sizing Up the Players

If you could buy shares of only one of these great marques for capital gain, which would it be?

This quandary might be easy if you are a happy Tesla automobile owner. Tesla, Inc. ( TSLA ) has roared ahead for years based on its early customer satisfaction. Having rented three different electric vehicle ("EV") manufacturers’ products, I can see where someone, if they can charge their EV in their home overnight and/or live in urban areas where Tesla charging stations are abundant, would find Tesla automobile ownership a good choice. But does that make the stock a good buy right now?

Then there is Toyota Motor Corporation ( TM ), the most popular brand in the world as measured by total sales. They aren’t just the most popular brand, they dwarf most of their competitors, with 5,420,000 cars sold in the first half of 2023.

That is more cars sold in 6 months than the 4,530,000 cars sold by Tesla since the sale of its first car in 2008 through July of 2023. Such is the size of the Toyota machine! Investors have rewarded TM for its ability to provide the kind of vehicles that the world wants to buy: its shares have risen 32.1% over the past 12 months. TSLA shares have done well, too, rising 17.2%.

That brings us to tiny – by comparison – Subaru Corporation ( FUJHY ). How small is their market share? They sold a grand total of 350,699 cars in the USA in the first half of the year and something like 200,000 in other parts of the world. We’ll be conservative and call it 540,000 to 550,000 cars, many of which are SUVs. (Their best-selling models in the U.S. are the Outback, the Forester, and the Crosstrek, which combine to equal a bit over 80% of all models sold in the U.S.)

That may seem like a very small number of vehicles sold, but it is up a very respectable 15.3% YoY in the U.S.

Subaru only accounts for 4.4% of the U.S. market – but it is one of the fastest-growing marques in the country. By the way, if you are wondering about the strange stock symbol, Japan’s Fuji Heavy Industries acquired Subaru of America, a company founded in the U.S. and traded on the NYSE under the symbol SBRU, until 1990. Fuji has since changed its name to Subaru Corp.

Clearly, these are three very different companies!

Potholes on the Road to EV Heaven?

I should first discuss my own experiences with Tesla and two other EVs. These outings have somewhat blunted my belief in the projections made for the demise of the Internal Combustion Engine ("ICE"). I do not own an EV, hybrid or BEV (battery EV). They have not proven themselves worthy of the additional price (even after all the incentives and rebates) when living at 7000’ in the Sierra Nevada Mountains. While I am just a 45-minute drive from Tesla / Panasonic’s first gigafactory, we don’t see a lot of Teslas up here in snow country in the wintertime. Living here, we need cars with ground clearance, the best braking, gear-shifting (even if only via paddle shifters), and alert reflexes.

My first EV experience driving a BEV was in Norway. I figured that would be a no-brainer, since Norway has the highest adoption of EVs per capita of any nation and, besides, the road tolls and ferries were free or close to it for EVs, rendering a substantial saving. Also, charging the EV in a nation that gets 97% of its power from hydroelectric was considerably cheaper than buying petrol in a nation that is trying hard to discourage ICE ownership.

The car was great! It was basically a VW SUV, but made by their Spanish subsidiary SEAT. And, yes, the online maps showing the massive number of charging stations blanketing the entire country did not lie. However, the 20-somethings at Hertz did lie.

“Just download the app,” said they who had likely never driven beyond Bergen, where the primary charging stations were copious and always responded to “the app.” The problem, we soon discovered, is that there is no such thing as " the app .” There are 15 or 20 competing charging station companies. And Norway is so advanced you do not slip your credit card into or slap it onto a screen, oh no, you use the QR code of that charging company’s app. Our first experience was so painful trying to download and use the biggest vendors’ apps that a kind stranger put 100 kroner (10 bucks) on their tab to let us make it to the next station.

Next, it does no good to have 1000 charging stations in the cities. We know Norway well and wanted to be far, far away from the crowds of tourists. My wife and I figured, “No problem. We will stop for lunch, come out, and find our SEAT fully charged.” Riiigght. Stay for a dessert – or three. We found many times the charger added only about 50 or 60 miles to our battery! Wouldn't you think the superfast charging stations would be out in the country, where the stations are few and far between? Nope. The superfast ones are in or around the cities where people would quickly tire of waiting in line. We were in the beautiful backcountry of Norway, not the big cities. We read a lot of books and took great hikes, all before our SUV was fully charged.

Hmmm. My second opportunity to experience EV life on the road was in Florida. I still believe EVs are great for city-dwellers and people who don’t mind reading War and Peace – twice -- while waiting for their battery to be charged. This time, I rented a Tesla.

It was a great little car in many ways. It met my first criterion: speed. I loved that. However, it was incredibly bossy. I found myself muttering all the way down to the Lower Keys, “Don’t try to steer for me. Don’t nag that I am over the speed limit. Don’t tell me not to change lanes just because a truck is coming from Wisconsin in another 10 minutes.” I used to race. I love to drive . My idea of hell would be a completely autonomous vehicle. We call that a train. Or a bus. Or a rickshaw.

At least they did not lie about the charging stations. I was assured that this time there were scores of fast chargers, mostly Tesla chargers, all over Highway 1. And there were! They were everywhere. Unfortunately, so were the tourists. The population of the Keys quintuples during the months which also happen to have the best weather for diving. So my drive trip to visit some favorite dive partners who live in the Keys took a bit more time than I expected.

Again, I had to wait in line for my turn to recharge or I had to find the one charging station in back of the old hotel that you have to maneuver through the construction zone to get to that will provide a full charge in 6 or 7 hours. Seriously, I drove my Tesla there, had one of my dive buddies pick me up, got on his boat, blew two tanks, parked at the marina, had a couple of beers, and went to recover my car.

My third experience – that’s right, I am clearly deranged – I specifically did not “rent an EV.” We were meeting the daughter of some close friends in Barcelona and taking her on a little driving tour of the Pyrenees and southern France. Done it many times. Always stopped for petrol when we needed it, never took more than 5 minutes to fill it up. Insert card, fill tank, go. The car I reserved was a nice little Renault, perfect for driving in what Europeans humorously call city streets and the rest of the world calls, more accurately, cow paths that are stacked with parked cars on both sides so tightly that only prayer and absolution will get you through without banging into something.

However, Hertz had some special deals with EV companies, akin to a pact with the Devil. I went over at noon for my noontime reservation -- and was told they were all out of the car * I reserved * until 8 pm, but they would give me a major upgrade. Yep, you guessed it – an EV, this time a Polestar. Now my Lovely Young Bride and I had agreed: “No more EVs for a road trip!” My dilemma is that we had checked out of our private lodging. (New mantra: Eschew our brief foray into booking.com and Airbnb. For the same price, stay in hotels, where they have a lobby to sit inside of and a staff on duty!) My wife was now sitting in the hot Barcelona sun with our luggage and our young friend’s luggage as her only shade. Wait till 8 pm, cancel our hotel reservation in Andorra, drive at night in what was supposed to be a thunderstorm journey by then, or take the )(*T^#*^Y&@ EV? I took the Polestar. I will stop here. You know by now what the Perils of Polestar were to be…

So. Nothing against the EV revolution if you have a charger in your garage. Or if you live in a city where the charging stations flourish like bars on a Saturday night. But beware the fables of “just plug it in while you shop” and other urban tales. I will complement the Eurozone for doing one thing to overcome all this. Since each charging company might use a different type of 4 different connectors, it looked like a pit of vipers in the trunk of our last excursion. However, the EU has since mandated that all chargers, even though from Tesla competitors, must adhere to the same size connector as the Tesla charging stations.

When I heard this, I at first thought, “What a coup for Tesla. This can only help their reputation and their sales.” Then it occurred to me that it really just means if you are a Ford guy or a Toyota gal or a Porsche gearhead, it only makes it easier for you to charge courtesy of Tesla (at the price regulated by the EU, of course.) It might even make it easier for competing EV companies to sell their cars since they know that their connector will fit every charging station.

One other item about the EV revolution. It has been quite well-funded by thee and me, whether we own an EV or not. One of the most compelling reasons why EVs have until now been selling like hotcakes has been: rebates, tax incentives, and discounts provided by governments that believed it only fair they should take everyone’s tax dollars, like it or not, for the greater social benefit they have decreed be financed.

Here is the problem I see with this. As soon as the discounts, rebates, and tax credits are withdrawn, EV sales tend to fall, sometimes precipitously. Here are three examples:

China removed most rebates and discounts earlier this year. One reason there is a glut of lithium and other battery metals may be that China, tied with India, has a massive population. =But without rebates and such, BEV ) sales declined markedly. This is one reason why Tesla has had to drop the price of its cars, as evidenced by their 6.2% lower revenue showing from the second quarter to the third.

Originally, Norway’s package of tax incentives exempted what they call zero-emission vehicles (ZEVs) from the registration tax, VAT, and motor fuel taxes, and gave a 50% reduction in road taxes, ferries and even municipal parking fees. That has changed. EV owners must now pay 40% of the road tolls and 50% of the ferry fees. There is talk that will rise and that even the exemption of ZEVs from the registration tax and VAT might be removed.

Sweden also supported the EV market by providing a maximum SEK 60,000 bonus (about $5600) for low-emission vehicles, while simultaneously putting extra fees on gasoline and diesel vehicles made after 2018. But last November, Sweden’s new government abolished these state subsidies for electric cars and plug-in hybrids. Sales fell.

Will the rebates continue to be scaled down or withdrawn in the U.S.? Will that also impact EV sales? And since the combined federal and state gas taxes pay for about 31% of U.S. road and highway maintenance costs, if no one – in the desired end-game in the future – is buying gasoline, will EVs be taxed for the electricity they use to compensate for that?

Having thrown just a few drops of rain on the “we will all be driving EVs by 2030” projections, let’s review each of these companies as firms we might yet invest in. Let’s review their share price, valuation numbers, and customer loyalty statistics.

Tesla

Whether you like the idea of EVs or not, whether you like Tesla automobiles or not, you must give TSLA kudos for taking a newer technology and making a profit at what they do. According to the Wall Street Journal (Oct 28, p. B12), Ford ( F ) lost about **$37,000** on each electric vehicle it sold last quarter. Heck, that is less than the price of a whole lot of new cars – how do you lose $37,000 for every car you sell?

Having already talked about BEV charging problems above, I think it is imperative for Tesla to differentiate itself from the rest of the many competitors, a list that seems to grow daily. How do they do that?

Well, they could have breakaway styling that starts a whole new rush to own. Think the Volkswagen Beetle, the 1958 Corvette and T-Bird, the 1965 Mustang, or a number of innovations from Mercedes Benz, BMW, Porsche, and others since. Some would say they have already achieved this with the smooth aerodynamic lines of all their cars. Of course, the Cybertruck doesn’t quite fit that look, but it may set a whole new Jetson family styling takeover.

Another way Tesla can brand itself as superior is via significantly better engineering and manufacturing than anyone else. No one likes even the little niggling, non-driving things that beset many new cars. A key fob that takes three times to work – and must be replaced only by dealers. An air conditioning system that you cannot find a happy medium for. Etc. Then there are the numerous recalls for this or that. Tesla does seem to have an edge here in that so much of what might be wrong can be fixed with an over-the-air software upgrade. As long as Tesla can maintain either the fact or the illusion that theirs are the most dependable, solidly built vehicles on the road, they can certainly maintain their King of the Mountain status. If that slips, however….

Another way would be to become the most cost-efficient producer. Some economies of scale will be gained by having gigafactories located closer to the purchasers. That was the reason why Tesla located its first overseas gigafactory in Shanghai. Regrettably, the competition among other EV and BEV rivals in China is much fiercer than elsewhere and it has caused Tesla to lower prices there just to stay in the fray.

In addition to the original (and still largest) gigafactory in Storey County, Nevada (just outside Reno and Sparks) there are now factories in Buffalo, Shanghai, Berlin, and Austin, with another in Mexico slated to begin full production very soon. What these all have in common is that none are unionized. While there have been many attempts to do so, Mr. Musk realizes that Tesla would then be at the mercy of, in the U.S., the UAW. It must cause a bit of restless sleep among members of the current administration who are hell bent for election to see no more ICE cars and trucks on the road, but also are so in thrall to the unions that President Biden did a little walkabout to show just how much this administration wants to see union labor.

Besides styling, significantly better engineering and manufacturing, and economies of scale allowing Tesla to undercut other competitors, I am hard-pressed to think of what it can do to continue to knock the ball out of the park. Maybe there are enough lazy people out there who want their car to drive for them, leaving just a smidgen of deserted desert space for the Mad Max among us. Even if that is so, who is to say Tesla will be the first to achieve this? Just last Friday, Ron Baron (founder of Baron Funds) said in a MarketWatch interview that Tesla will be a 4 trillion-dollar company in the next 10 years. Ron Baron is richer than I am, so maybe he is on to something. Either way, I solicit comments from readers who can tell me how this company will create a moat so impressive that they will reach that level that quickly.

Toyota

Toyota has undertaken a very different strategy in dealing with the EV revolution. The company most recently made it very clear that they believed hybrid vehicles that use battery power, as well as internal combustion engines, are the smartest way to move into this Brave New World. As the world’s biggest automaker, it does them little good to jump solely into direct and bloody competition for EVs. Toyota has a loyal following that buy their cars year after year. Why deal with the headaches of competing “against themselves” with nothing but BEVs? (My words, not theirs.)

Toyota does make BEVs and has announced the company is developing a wide range of them, from small “urban mobility vehicles” -- an inspired idea when Tokyo is the most populous city in the world – to those that I would gladly rent for a long-distance road trip The company expects to launch 15 models, with designs based upon the demographics and demands of different regions, by 2025. But they are not giving up a goose that is currently laying golden eggs in a headlong rush to be the biggest in BEVs. Let others work out the kinks.

Toyota does make great hybrid automobiles already. Doubt it? Highly respected car magazine/website MotorTrend just named the now-available 2024 Toyota Prius hybrid the “2024 MotorTrend Car of the Year.”

This is definitely not your father’s Prius. One of the first words that comes to mind when I think about Toyota is innovation. They took the old (old) Prius, which was great for its time, and turned its loyal followings’ collective heads with this newer, sleeker, (much) faster model this year. For their efforts, the latest version is even better. Toyota is never satisfied with what is. They always think farther into the future than almost all their competition.

Here is a listing of only a few of Toyota’s better-known cars:

• The full-sized Avalon sedan
• The mid-sized Camry sedan
• The compact Corolla sedan (the best-selling Toyota globally)
• The Highlander and Highlander Hybrid, a midsize SUV we see a lot of up in the windy, icy mountain roads in wintertime
• The RAV4 Hybrid and the RAV4 Prime plug-in hybrid small SUV
• The Tacoma compact pickup truck.
• The Mirai, a fuel-cell/hydrogen executive sedan
• The Crown rear-wheel-drive luxury sedan, available in hybrid and fuel cell hydrogen powertrains.
• The Prius hybrid compact liftback, 2024 Car of the Year.

Toyota dominates the hybrid sub-sector of all automobiles from all companies with its RAV4 Hybrid, Highlander Hybrid, and Prius Prime.

I would never vote, or vote with my investing dollars, against Toyota.

Subaru

Okay, even Subaru joined the pack and provided us with an EV, the Subaru Solterra, for the 2023 model year. But mostly Subaru has refrained from the costly jockeying over the past decade between Tesla and all the legacy car makers that were shouting, “Us too! We got us one of them new-fangled EV thingies, too!”

Subaru simply continued building sturdy, dependable, well-engineered, great-driving cars. They have an incredibly loyal following of owners, some of whom turn them in for a later model after 100,000 miles, others who are still driving theirs another 100,000 miles. Their cars and SUVs are not flashy. The SUVs look a little beefy but not to the silly degree that some manufacturers go to in order to play on the emotional heartstrings of the office worker who wants to see himself as a rodeo cowboy and buys those “this car will make you like a man’s man” pickups and SUVs.

Subarus are often priced lower than its competitors' vehicles given that the company doesn’t need to do nearly as much advertising. Word-of-mouth gets a lot of new drivers into their showrooms. It did not hurt that for the past 20 years or so, Subaru was the official car of the US Ski Team and the National Ski Patrol. Watching other drivers slip and skid or grind their snow chains into the dry patches is one of the benefits of owning a marque that has fabulous AWD across its entire lineup (except for the BRZ sports coupe, developed by the way in partnership with Toyota.)

The Subaru Forester Consumer Reports calls a “small SUV.” I say it is just the right size. No big, flared fenders or oversized mirrors. No seating for 7. Just quality build, great mileage, and reliability. Like most Subaru models, it boasts excellent visibility, simple non-distracting controls, a comfortable ride, and very responsive handling.

All 3 Have Some Fine Vehicles… But Which Will Do Best as an Investment?

I have only rented Teslas. I have owned Toyotas. I have owned and own today a Subaru. But none of that matters when I look at the following:

I am not much interested in how these companies have advanced over the long term. I think the increased competition from China and elsewhere has created a whole new playing field. I am looking, therefore, at this most recent year.

Tesla stock was the most volatile over this time, plunging 32% in January before climbing back. Toyota and Subaru were pretty steady, with Toyota having a nice climb just recently.

Dividends aren’t an issue. Tesla doesn’t pay one and the other two pay a very low rate.

Valuation

For the trailing 12 months ((TTM)), TSLA’s P/E was 75.58x earnings. It is a good thing Ron Baron is looking 10 years ahead. Both TM and Subaru were single digits. Worse for TSLA, their forward projected P/E is expected to get worse, while the other two are projected to get better.

The story is the same for Price/Sales. Tesla at 7.74 is richly priced. The other two, not. The same is true all the way down the list from there. I do want to draw your attention to Subaru’s superb EV/EBITDA and Price/Book ratios. From a value standpoint, Subaru wins hands down. It does not have the momentum of the other two, but it certainly looks like it is the safest way to go.

I did not expect to see Subaru’s year-on-year revenue growth surpass the other two. Given that it is coming from a lower base, it makes sense. But it also excels in every single year-on-year category. It could be just because it is starting from a lower base, or it could be the beginning of something big.

Looking at the balance sheet for the most recent quarter, the first thing that leaped out at me was that Subaru’s total cash per share was almost as much as the share price itself!

Next was that TM’s total debt/equity exceeded 100%. Not a problem for a growing company, especially if that debt is at a low combined rate, but still a surprise.

Then came Subaru’s BV. The book value per share is double its current price.

“What Can I Do to Put You in This Car?” as the Salesmen Say

Tesla may yet rule the world’s car market and, oh why be shy, the world’s economy. But for me, the most compelling buy here looks to be The Tortoise, not The Hare. Subaru impresses me for its loyal following, its magnificent safety record, the imprimatur of Consumer Reports, its growing following, and its low share price compared to the various valuation and balance sheet metrics.

I recently bought Subaru shares for myself and for our investment group's model portfolio. (I also bought some Mercedes Benz at the same time. Maybe I will get to that in a future article.) Finally, I have a limit order to buy some TM at a lower price. If we get a correction or TM stumbles temporarily, I will own that as well. I have nothing against owning TSLA at a lower price. I wish the company well! It is just not my cup of tea at its current price.

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