“Price is what you pay; value is what you get.” —Ben Graham
“Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold.” —Warren Buffett
The world has been turned upside down by the Covid19 pandemic and the financial markets do not seem to care. The stock market is defying gravity with the help of unprecedented government stimulus. Major market indices are making a stunning rebound even as Covid19 continues to spread and total deaths in the United States climb above 75,000. In many key industries, uncertainty around earnings remains very high. Nobody knows with any accuracy what airlines will earn in 2021 and beyond. Will people fly as often as they did pre-Covid19? Will business travel suffer in the long term? What about the hotel and hospitality sectors? What about commercial real estate? Will people continue to ride-share in an Uber or Lyft car? The energy industry is in turmoil with futures contracts in oil turning negative—yes negative! We do not know how many human habits will permanently change as a result of Covid19. Working from home, using video conferencing, and shopping for groceries online have suddenly become the new normal. (Featured image courtesy of Forbes).
The chaos of Covid19 has greatly impacted the automotive industry. Factories across the globe are shuttered and dealership sales have slowed to a trickle. Meanwhile, the automotive industry continues to experience its own ongoing Creative Destruction. For years we have written about electrification, ride-hailing, and autonomous driving and how these trends are upending the industry. But today, valuations of automobile companies have never been more telling—and confusing. The market loves electric cars and fast Italian exotics and eschews the F-150 pick-up truck. Consider the following numbers:
- Ford is worth $19.37 billion
- Ferrari is worth $29.62 billion
- General Motors is worth $32.14 billion
- Tesla is worth $144 billion!!!!
Could Enzo Ferrari ever have imagined that his tiny company would one day be worth more than the Ford Goliath? Did the once invincible General Motors ever think that an upstart California-based electric car company run by a rogue outlaw would be worth over four times their market capitalization? These are indeed interesting times!
Back in February of 2016 we noted that Ferrari stock was trading at $31, down from its $52 IPO price. At that time, Barron’s noted, ““Now, at a price/earnings ratio of 18 times analysts’ consensus EPS estimate of $1.86 this year, the stock is more reasonably valued, but its outlook is cloudier.” We indicated that the stock was interesting at $35 to $40 per share—if only we really knew how interesting it was back in early 2016!
Maybe the best thing we can do here is to reflect and learn from the wisdom of Warren Buffett’s timeless 2000 investor letter which said, “At Berkshire, we make no attempt to pick the few winners that will emerge from an ocean of unproven enterprises. We’re not smart enough to do that, and we know it. Instead, we try to apply Aesop’s 2,600-year-old equation to opportunities in which we have reasonable confidence as to how many birds are in the bush and when they will emerge (a formulation that my grandsons would probably update to ‘A girl in a convertible is worth five in the phonebook.'”
I agree with Bob Kahrl’s comments. I also think the Ford’s and GM’s are toast under their current model. Tesla cars cost of goods sold are roughly one half their Ford/GM equivalent. Tesla has no dealers to speak of. Service requirements are minimal. I think investors know this.
Oh wow, I have to respond to this. I am a long-term investor. Sort of like the fellow whose picture heads your column. Now the pundits, including yourself, who are immersed in the world of traders, short-term investors, hedge funds, and mavens of quarterly earnings (an artificial contrivance of performance at best), are doing a lot of hand-wringing, suggesting that the world will never be the same, and our lives will be changed forever by this pandemic. I disagree, and my evidence is the whole history of human nature. Human behavior seeks a comfortable stasis. Most people prefer familiarity to uncertainty. Most people prefer social interaction to isolation. Most people prefer productive work and income to sitting at home and receiving a check for a small amount of money. The pressure toward normalcy is going to increase every day, and no amount of demanding and exhorting from so-called “pandemic experts” and “public health experts” will stop this inexorable return to normal human activity. It is certain that earnings this year are going to look terrible, that some companies will die, and rates of infection will continue to increase. This is all short-term stuff. There is nothing about this pandemic that requires permanent social change, and nothing about it that causes long-term financial disaster. This is not like the bank collapse of the last decade. This is not like the rampant inflation and oil crisis of the early 70s. Moving on from this pandemic is simply a matter of people accepting risk and the inevitability of death. They will see that COVID 19 is simply another disease to add to the spectrum of diseases that kill 3 million Americans every year. These other diseases also prey mostly on older Americans, so there isn’t much new about this disease from that perspective. People accept dangers every day in how they live, and they adjust their attitudes toward the dangers they accept. Thinking long-term, and by that I mean further than next December, people will accept the danger of the coronavirus, just as they have accepted the dangers I, for example, of driving an automobile or eating sugar-filled foods, or riding a motorcycle without a helmet and so forth. So as a long-term investor, I am going to ignore the quarterly earnings statements for the next couple of quarters because the companies in which I have invested are not going to collapse.
Besides, there is likely a silver lining here. Perhaps in the short term, the price of a 365 GTB
will continue to decline, and I can finally justify obtaining the most beautiful car that Enzo ever made.
Bob,
We would tend to agree with you overall in the long term about human habits and social change and how we will adapt to a new normal. Hopefully you are right and we see falling prices for our dream cars! However, I do think Covid19 did pull forward and expose the fragilities of the financial system that have been building up for years. The virus has exposed the weakness in earnings that has been going on for years as well as exposing bad financial decisions like debt funded stock buy backs. Part of this will be a cleansing whereby companies that should have filed bankruptcy a long time ago are now being forced to do it. However, many zombie companies are being protected. There has been a lot of misallocated capital, not a lot of cap ex, and a huge build up of debt since 2008. Almost 40% of the Russell 2000 are not earning any cash. The one thing that seems certain to come out of Covid19 is much slower growth. We are seeing diminishing returns from all this debt. What the Fed is doing is necessary, however, it is also serving to reward bad behavior on Wall Street. Savings are going up. Corporate profits are going down. We have huge slack in the economy. We are going to have a huge surplus in office space, airplanes, oil and gas assets, and retail. The virus shock is increasing excess capacity around the world. Also, unemployment will remain structurally higher as a result of Covid19–comapnies will be slow to rehire and some jobs will be forever lost. Add to all this the rise of artificial intelligence and jobs are going to be displaced by machines. So maybe if this is all true deflation is inevitable and that 365 GTB will become very cheap—-the problem is none of us will be able to afford them!