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5 top picks to ride the EV wave

Lewis Jackson  |  13 Jul 2021Text size  Decrease  Increase  |  
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The electric vehicle revolution is underway, and Morningstar has some high-quality undervalued names for your portfolio.

Automaker BMW (BMW), auto part maker BorgWarner (BWA), Chilean lithium miner Sociedad Quimica y Minera (SQM), chemical maker DuPont Nemours (DD) and electric utility Edison International (EIX) are all narrow-moated names currently trading below their Morningstar fair value estimates.

The companies are spread across the supply chain for electric vehicles (EVs) and hybrids, which Morningstar forecasts will make up two out of three cars sold by 2030. This is an increase from last year’s forecast of half of all new cars.

A Morningstar narrow-moat implies a 10-year competitive advantage, valuable in the EV sector where billions of dollars in SPAC money is taking many new players public. SPACs pool investor money and search for private companies to merge with and take public.

Morningstar senior equity analyst Seth Goldstein says SPACs are “one of the riskiest ways” to get exposure to EVs.

The six picks are from a recent Morningstar report on the future of electric vehicles. Of the 33 names listed, we’ve selected those with narrow moats who are undervalued.

Narrow-moat Tesla (TSLA) was excluded because it’s trading in a range considered to be fair valued. It closed Monday US$685.70, above the fair value estimate of US$550.

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Five high-quality undervalued EV names

Auto manufacturer

BMW

BMW makes premium passenger vehicle brands BMW, Mini, and ultraluxury brand Rolls-Royce as well as BMW brand motorcycles. In 2020, BMW had 14 electrified models available to consumers, which accounted for 8 per cent of sales volume.

BMW expects fully electric models to annually average 50 per cent growth through 2025. In 2025, the company plans to have 25 electrified models, of which, 12 will be EVs and 13 will be plug-in hybrids. By 2030, BMW targets at least 50 per cent of its global sales volume to be EVs.

Auto parts

Borgwarner

BorgWarner makes motors, gearboxes, inverters, converters, battery management systems, on-board chargers, and software for EVs. The company also combines components and software into a complete integrated drive module.

In 2030, BorgWarner targets around 45 per cent of its revenue from EVs, up from slightly less than an estimated 3 per cent in 2021. Morningstar expects revenue to average 2 to 4 percentage points of growth in excess of global light vehicle production as EV penetration outpaces declines in internal combustion engines (ICEs).

Lithium mining

SQM

SQM's largest business is lithium production. Lithium will benefit from increased EV adoption as greater lithium demand will result in higher prices and profits.

SQM is investing in expanding its lithium capacity over 3 times over the next decade, largely through low-cost brownfield capacity expansions. Morningstar views these investments as value-accretive given its favourable EV outlook.

Specialty chemicals

DuPont de Nemours

DuPont sells specialty polymers, materials to produce battery separators, and electronic materials to automakers and auto suppliers throughout the EV supply chain. The company generates roughly 50 per cent more revenue per EV or hybrid versus ICEs.

DuPont invests around 4 per cent of sales in R&D every year, which Morningstar view as sufficient to continue developing new premium products. As EV adoption grows, DuPont should benefit from selling a greater proportion of premium products into the EV supply chain.

Utilities

Edison International

Edison's Southern California electric utility is embarking on the largest EV charging network expansion in the US right now. The investment in the charging network and the distribution infrastructure to support the new chargers will total about US$1 billion.

Edison plans to spend US$16 billion during the next three years on distribution and transmission upgrades in California, representing 7 per cent annual growth in its asset base. As EV penetration grows, Morningstar expects investment in EV-related infrastructure and energy storage to make up a larger share of its growth investment.

is a reporter and data journalist with Morningstar. Tweet him @lewjackk or get in touch via email

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