Often, the best way to invest is to own the enablers of change, or what we call the ‘picks and shovels’ providers – a concept that goes back to the gold-rush days of the mid-19th century. While many miners experienced disappointment in their search for gold, the people selling the equipment were far more prosperous as they sold more picks and shovels to each new wave of prospectors.
Living in the Connecticut suburbs, my inner farmer has been alive and well for years. The news that Ford (not held in our portfolio) is coming out with an electric pick-up truck in 2022 certainly caught my attention. The F-150 electric truck, named Lightning, looks awesome. And the market noticed too, sending Ford shares up 30% since the announcement and more than 70% through almost to end of June 2021.
As an equity investor, I have a different reaction than a consumer might. Looking at the automotive industry, I am fairly confident the peak annual global auto production rate of 90+ million vehicles in 2018 is not going to change meaningfully over time. And, quite frankly, autonomous driving, if it happens, might reduce the number of cars sold each year. Therefore, my investment questions revolve around whether Ford will ultimately sell more electric vehicles than internal combustion engine vehicles based on market share gains or higher profit per electric car. Given the hyper-competitive automotive industry and the number of new entrants, I believe either dynamic will be hard to achieve. Ford’s stock price, similar to what it was 35 years ago, would suggest new technology becomes commoditised in the auto industry.
Is the market wrong to get excited about new innovations? This is a critical question for investors – are they being adequately rewarded for picking winners in various industries? Frequently, investors are not rewarded relative to the risk they take. That is not to say industry leaders do not have strongly performing stock prices. We have several of them in our portfolio. My point is simply that when industries change with an elevated level of uncertainty, identifying the winners is difficult.
The electrification of the automotive industry is a megatrend that we and other investors want to get behind, given its expected industry growth. But what is the best way to do that?
Looking for the enablers is a good strategy. We see Aptiv, a current portfolio holding, as fitting the bill of a pick and shovel provider in the auto industry. Aptiv is a well-diversified business by geography and customer type that sells critical technologies to global automotive manufacturers. After divesting its engine-related business in 2017, its two remaining divisions are Signal & Power Solutions and Advanced Safety & User Experience. Signal & Power Solutions is a leading supplier of vehicle electrical architecture, with systems on almost 30% of new vehicles globally. With the transition to electric vehicles, auto manufacturers are replacing legacy wiring harnesses with more capable and scalable ‘smart architectures’. Aptiv today sells around $500 of its product into an average car with an internal combustion engine. But that product opportunity grows to more than $1,200 in an EV, and Aptiv’s new business awards suggest the company is gaining significant market share. As investors, that is a transition we think is very interesting.
Aptiv’s diverse products include automatic emergency braking, adaptive cruise control, blind spot detection, lane-keep assist or surround view. These are technologies that customers are willing to pay for and, after using them, fewer than 10% are willing to go without on their next vehicle. While installed today in only a minority of vehicles globally, they will roll out in waves over the next decade, each adding to Aptiv’s opportunity. Combined with an increase in electric vehicles, we see Aptiv’s content per vehicle expanding significantly, driving growth well above any change in the number of cars produced each year.
To us, the assumption that there will be more electric vehicles with more technology content is an easier call to make than predicting what Ford’s or GM’s market share will be in five years.
Jim Tierney is CIO and portfolio manager of the AllianceBernstein Concentrated US Portfolio