2023-06-01 14:46:33 ET
Summary
- Nissan's long-term fortunes have been negatively impacted by factors such as the CVT automatic transmission issue in the North American market.
- The company is attempting to pivot towards electric vehicles (EVs) to regain its reputation, with EV sales growing even as total unit sales decline.
- However, Nissan may lack the resources needed to keep up with industry peers in the global EV transition, as it cannot rely on conventional car sales to subsidize losses in its EV segment.
Investment thesis
Nissan's ( NSANY ) long-term fortunes have been trending South for a number of years now.
A number of factors contributed to this. Notably, for the North American market, arguably the CVT automatic transmission issue and its poor handling of it played a major role in tarnishing the brand's reputation. One of the purported solutions for the company to sidestep this issue altogether is to pivot harder into the EV space, which it has been increasingly doing in the last few years. Unlike ICE vehicles, EVs do not need a multi-speed gear shift system, thus a shift to EVs is arguably a perfect fit for Nissan, given the ongoing CVT issue. One of the factors that may get in the way of the company achieving a successful pivot to mostly selling EVs is the fact that all these years of sales and financial underperformance left this company somewhat hollowed out and weakened relative to other automotive peers that are also looking to perform a similar pivot to some extent. At this point, it is very hard to make a viable argument in favor of investing in this company, even though some metrics and details may seem to make it look like a viable investment bet this year.
Nissan saw improved financial results for FY 2022
For the fiscal year of 2022 ending on March 31, Nissan saw an improvement compared to the net income it experienced in FY, 2021. The 241.2 billion yen in net income is a respectable result. It comes out to about $1.6 billion in net income for the year, which is a respectable result and an increase of just over 3% in yen terms. Revenues increased to 10.6 Trillion yen, compared with 8.4 Trillion yen in the previous year. The profit margin for the year came in at 2.1%. For the same period, debt in the form of bonds issued and outstanding increased by 205 billion yen, to a total of 2.26 Trillion yen.
While sales have been on a steady downward trend, Nissan is forecasting a significant increase in sales for the current fiscal year.
Between the decent financial results and an improved sales outlook, there is arguably a compelling narrative in favor of Nissan as an investment opportunity. We should also keep in mind that it is just a forecast and there are plenty of reasons to expect downward revisions, given the overall bleak state of the global economy.
Nissan is trying to pivot to EVs, which would help it to leave the arguably ruinous CVT issue behind
Nissan's 2022 performance is not bad by any means and the outlook looks bright. The one metric that is poor is the unit volume sales trend of the past few years, which was not broken in the last fiscal year, as it continued to deteriorate. Within the overall sales data, we see that even as total unit sales are declining, its EV sales are growing, which seems to be the best hope for Nissan to try to turn things around and regain its reputation in the long term.
In the European market, it seems pure EV models are stagnating, but there was a significant increase in its e-power unit sales, which are EVs with a gasoline-powered backup electric generator in case that extra range is needed.
We see a somewhat similar trend for Nissan EV and hybrid sales in its home market in Japan, with Nissan sales far more tilted toward EVs and e-power vehicles than conventional car sales in Japan, compared with other markets.
Nissan's biggest problem in regard to its CVT transmission is the North American market, since here is where most of the automatic transmission car sales occur. Nissan is yet to make a significant splash with its EV line-up so far this year in the North American market. So far, in the first three months of this year, Nissan sold just under 4,400 EVs in the US. Given its overall North American sales volume in the 1 million vehicles per year range, this is hardly significant. In other words, the one market where it does need to pivot to EVs the most is the market where its EV sales are the weakest.
Nissan probably lacks the stamina needed to keep up with industry peers in regard to the global EV transition
As the race to secure market share within the growing EV market intensifies, it is increasingly clear that legacy car manufacturers in particular can benefit from a solid financial and market situation. Many companies are said to be currently losing money on their EV sales, which they tend to subsidize from profits earned on their ICE-powered vehicle sales. For instance, Ford ( F ) has been losing significant amounts of money, roughly $20,000 in EBIT terms on each and every EV it sells, and the losses seem to be structural, in other words, they are not going anywhere anytime soon. Many other legacy car makers are thought to be losing money on their EV sales. Ford's decision to provide us with a segment breakdown in terms of its financial results offers us a glimpse into just how tough the next few years might become for many automakers.
With profit margins being rather thin currently, Nissan may not have the luxury of relying on conventional car sales to subsidize losses in its EV segment. Furthermore, product development may end up costing legacy car producers a lot. A profitable ICE-powered business model has the potential to cushion the blow from what is thought to be expected initial losses for EV product line-ups, especially in the non-luxury-priced segment. The city car segment of the EV market may also escape losses since it is just a matter of churning out cheap EVs with very little practical range as well as other drawbacks. It is with EVs meant for the broader middle class where a combination of demand for practical range for all needs, where EV producers are having a hard time and will probably continue to have a hard time for the foreseeable future in trying to at least break even.
Nissan as a brand is known for appealing precisely to the middle class that expects to get a practical car at an affordable price, much like Volkswagen ( VLKAF ) or Ford. For that, it needs to develop what are currently more or less impossible EVs, namely with ample range at an affordable price. The e-power concept certainly seems compelling as a solution, at least until perhaps EVs will reach the technological maturity needed to provide such capabilities on battery power only. It is however not much different from the Chevy Volt concept that has been around for a while now, and seemingly it did not inspire the market to pivot in that direction in terms of sales.
It remains to be seen whether Nissan's gamble on the e-power concept will pan out. Regardless, it is only a stop-gap measure, while it will work like all the other automakers to unlock the secret to finally producing an EV for the masses, with the reasonable range needed to replace the current utility that one derives from an ICE-powered car, for a reasonable price that typical middle-class consumers can afford. Most automakers will spend billions of dollars trying to achieve that milestone, and many will likely fail. In the meantime, Nissan will probably be forced to offer EVs in the $20k to $40k price range, with a driving range of 250-350 miles, while taking a loss on each and every vehicle, in order to establish a market presence.
S&P Global reduced Nissan's credit rating to Junk earlier this year, meaning that its creditworthiness may not afford it much room to seek funds to compete against many of its financially more powerful peers for a share of the fast-growing, but often still loss-generating EV segment of the global auto market. At the same time, it is more than likely that the CVT transmission issue will continue to negatively affect the company's bottom line. Recently it agreed to pay $277 million to settle with customers who faced financial loss due to defective transmissions.
For the sake of transparency, I should disclose that I owned a Nissan Rogue that had the CVT transmission problem. When Nissan refused to cover the costs of repair, I decided to trade it in at a very significant financial loss in 2019, rather than fix it and risk having the same problem occur again. I expect this problem will continue to plague the company for years to come. It lost customers by not covering certain models or vehicles built in certain years. It is also losing money by covering very expensive repairs, whether through its standard or extended warranties it offered for a portion of Nissan owners with a CVT transmission.
Investment implications:
There is no denying that the automotive industry is facing a tough decade, and perhaps beyond as a result of the pressures to pivot to EVs. Massive financial losses on each and every EV they will sell should be expected in my view. Some of them will be able to absorb the financial burden. Profits made on continued ICE-powered vehicle sales can be diverted to cover losses in the EV sector, especially for the duration when conventional cars will continue to make up the bulk of sales. Others, such as arguably Nissan might have a harder time with it, given its already weakened market position in the ICE segment of the auto market. I believe this will be a tough decade for car manufacturers, given the disruptive effect of the emergence of the EV trend. Some of the weaker ones might not make it.
Nissan is currently one of the weaker members of the automotive industry herd in my view. It remains to be seen how it will navigate through all of these challenges. A number of good moves, a bit of good luck, and some technological breakthroughs could help it pull through and even thrive. At this moment, based on everything we know, it is one of the riskier bets within the automotive sector despite somewhat decent financial results and a positive outlook on sales for this year, which on its own would make it a potential investment opportunity, only if one ignores the longer-term problems. There could be a case for a short-term bump in its stock price if external factors, such as the overall global economy will align, but in the longer term, Nissan is facing formidable challenges, that it may not necessarily succeed in overcoming.
For further details see:
Nissan: EVs Unlikely To Help It Turn The Page Past The CVT Issue