The electrification of the automotive industry looks set to be a boon for electric vehicle shares. While the UK stock market does not have a Tesla, it does have some big companies that could benefit enormously from the electric vehicle revolution.
UK electric vehicle shares
In the UK, the biggest is Johnson Matthey (LSE: JMAT). The company’s new markets division specialises in providing battery materials and fuel cell technologies to the transport sector. Its battery materials are designed for the electric batteries that power electric and hybrid vehicles. They make the batteries more powerful and improve their range.
Johnson Matthey’s fuel cell technologies are aimed at another interesting automotive trend, hydrogen-powered vehicles. Compared to pure electric batteries, hydrogen’s applications are less commercially developed, so its mass adoption is further in the future. But its benefits are tangible. So it’s fully expected to be rolled out at scale eventually.
Currently, the new markets division makes up only 9% of total sales. The bulk of the company’s sales come from producing catalysts for petrol, diesel and hybrid vehicles. Its catalysts improve vehicle emissions, so look set to benefit from tighter regulations. They also provide a reliable flow of revenues. While petrol and diesel vehicles may be on their way out, hybrid vehicles will play an increasingly important role in the decades to come. Johnson Matthey is also well exposed to the world’s largest vehicle market, China, responsible for 15% of company sales.
The new markets division isn’t actually profitable yet. Trading at 16 times last year’s earnings, the company’s share price assumes smooth and profitable growth for the new division. But even without an electric vehicle revolution, I think the backbone of the company is solid. It’s a market leader in its clean air business. What’s more, it has a strong balance sheet, a flexible cost base, and a decent dividend.
Another electric vehicle share is TI Fluid Systems (LSE: TIFS). The company manufactures thermal management and fuel tank systems for petrol, diesel, hybrid and electric vehicles. It’s a market leader in its main markets, and has existing relationships with all of the major vehicle manufacturers.
Hybrid and electric vehicles require more thermal management and fluid handling systems, compared with petrols and diesels. This provides TI with more products to sell per vehicle, meaning that it can make more money per vehicle and more money per automaker. Again, like Johnson Matthey, the company is well exposed to China and Asia.
Bloomberg has predicted that there could be 60m electric vehicle sales a year by 2040. The Chinese government has targeted 7m sales a year by 2025. Considering that only 2m were sold worldwide in 2018, this remains a big jump. Even if these targets are missed, there will undoubtedly be a huge increase in electric vehicles over the next few decades. Both of these companies should benefit.
But for me there’s only one winner. TI Fluid Systems is almost a pure play on this electrical revolution and looks like it has more to gain. More than 30% of Johnson Matthey’s sales come from outside of the automotive sector, where margins are lower and the story isn’t as favourable. TI is also much better value, with a P/E (price to earnings) of just seven. That’s why it’s the electric vehicle share I’d buy.
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Thomas has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2020