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Deep Dive: These stocks provide a better way to invest in the electric-vehicle revolution than the car makers themselves

The growth path for the electric vehicle industry seems inevitable. Governments are using incentives to encourage consumers to make the switch. Investors have been along for the ride — shares of Tesla Inc. have risen more 87% over the past year, while Nio Inc.’s stock has gained 175%.

But there are different and potentially more profitable ways to invest in the budding EV wave from here. Zehrid Osmani, co-manager of the Martin Currie International Unconstrained Equity Fund LUISX, projects annualized growth of EV unit sales of 40% until 2030. He shared two factors to consider:

  • There are many types of players in the EV revolution, and some related industries have much higher returns on invested capital than others.
  • Investors face risks as consumers’ tastes change. It’s impossible to predict which electric vehicles will be the most popular several years from now because the legacy auto makers are spending tens of billions of dollars to bring dozens of new models to the market.

Government policies will help drive the EV revolution. The U.S. auto industry had agreed with the Biden administration to a goal that 40% to 50% of new vehicle sales be electric by 2030. The European Union plans for all new cars registered in 2035 to be “zero emission.”

Some investors are already shying away from Tesla
TSLA,
-3.79%

and Nio
NIO,
-1.61%

because of those stocks’ high valuations relative to expected earnings and sales. You can see those numbers here. Shares of both of these EV manufacturers have cooled off — Tesla is down 3% for 2021, while Nio is down 21%.

But Osmani thinks it is important for investors to participate in what he calls “almost a certain structural growth driver” — the shift to electric vehicles mandated not only by governments around the world but by consumers.

Growth — high returns while avoiding the risk of changing tastes

The Martin Currie International Unconstrained Equity Fund is rated four stars (out of five) by Morningstar. During an interview, Osmani said he is playing the long-term transition to EVs by investing in companies that would serve all manufacturers, in industries with the highest returns on invested capital (ROIC).

A company’s ROIC is its earnings (less dividends paid out) divided by the sum of its equity and debt. If you are comparing two similar companies, ROIC can provide insight into which management team deploys capital most efficiently.

But ROIC also differs greatly between industries. Osmani summarized his team’s ROIC research for several industry group:

  • For auto makers globally, “you are looking at 5%” ROIC, he said.
  • For the EV battery segment, ROIC ranges from 7% to 9%.
  • Charging infrastructure: 5% to 6%.
  • Lightweight materials: 10% to 12%, which Osmani termed “somewhat more attractive.”
  • Technology and connectivity: 15% to 25%.

For that last category, Osmani said he expects two companies to hit ROIC in the 30% range: Taiwan Semiconductor Manufacturing Co. Ltd
TSM,
-3.17%

and ASML Holding N.V.
ASML,
-1.50%
.

Taiwan Semiconductor makes computer chips used in various aspects of EV manufacturing. With $45.48 billion in sales for its most recently completed fiscal year, it ranks second (behind Intel Corp.
INTC,
-1.70%
,
with annual sales of $77.87 billion) among the 30 components of the iShares Semiconductor ETF
SOXX,
-2.16%
,
which tracks the PHLX Semiconductor Index
SOX,
-2.19%
.

ASML makes specialized equipment used by semiconductor manufacturers — a business Osmani described as “a quasi-monopoly on the high-end tools.”

Osmani holds Taiwan Semiconductor and ASML in the fund as well as Infineon Technologies AG
IFX,
-1.30%

IFNNY,
-2.15%
.
“Infineon has close to 40% of its revenues generated from the autos end-market, so that is a very highly exposed company to the auto cycle,” he said.

Here are average ROIC for the past five calendar years for those three companies:

Company   Five-year average ROIC  ROIC – 2020 ROIC – 2019 ROIC – 2018 ROIC – 2017 ROIC – 2016
Taiwan Semiconductor Manufacturing Co. Ltd. ADR
TSM,
-3.17%

 
22.55% 26.83% 19.97% 21.05% 22.09% 22.80%
ASML Holding N.V. ADR
ASML,
-1.50%

 
16.79% 19.94% 16.74% 18.25% 15.42% 13.61%
Infineon Technologies AG
IFX,
-1.30%

 
9.98% 2.96% 8.56% 16.22% 11.35% 10.81%
Source: FactSet

We are using calendar years for these figures; Infineon’s fiscal year ends in September.

Looking ahead, here are consensus sales estimates among analysts polled by FactSet for the three companies, in U.S. dollars, through calendar 2025 (if available):

Company  Sales – 2020 Est. sales – 2021 Est. sales – 2022 Est. sales – 2023 Est. sales – 2024 Est. sales – 2025
Taiwan Semiconductor Manufacturing Co. Ltd. ADR
TSM,
-3.17%

 
$47,860 $56,402 $65,560 $76,951 N/A N/A
ASML Holding N.V. ADR
ASML,
-1.50%

 
$16,886 $22,170 $25,387 $27,382 $31,579 $33,506
Infineon Technologies AG
IFX,
-1.30%

 
$10,856 $13,324 $14,711 $15,918 $16,659 N/A

Each company has a different number of years for which consensus sales estimates are available:

  • For Taiwan Semiconductor, estimates go out to 2023 and would make for a three-year compound annual growth rate (CAGR) of 17.2% from 2020.
  • For ASML, estimates go through 2025, for a projected 14.7% CAGR.
  • For Infineon, estimates go through 2024, for a projected CAGR of 11.3%.

Here are consensus earnings estimates for the group:

Company  Net income – 2020 Est. net income – 2021 Est. net income – 2022 Est. net income – 2023 Est. net income – 2024 Estimated net income – 2025
Taiwan Semiconductor Manufacturing Co. Ltd. ADR
TSM,
-3.17%

 
$18,486 $20,839 $24,195 $28,797 N/A N/A
ASML Holding N.V. ADR
ASML,
-1.50%

 
$4,289 $6,496 $7,786 $8,700 $10,638 $11,809
Infineon Technologies AG
IFX,
-1.30%

 
$1,042 $1,671 $2,067 $2,362 $2,447 N/A
  • Taiwan Semiconductor’s earnings are estimated to increase at a CAGR of 15.9% from 2020 through 2023.
  • ASML is expected to show a five-year earnings CAGR of 22.5%.
  • Infineon’s four-year earnings CAGR is expected to be 23.8%.

Here’s a summary of opinion of these three stocks among analysts polled by FactSet:

Company  Share “buy” ratings Closing price – Aug. 16 Consensus price target Implied 12-month upside potential
Taiwan Semiconductor Manufacturing Co. Ltd. ADR
TSM,
-3.17%

 
89% $114.63 $146.33 28%
ASML Holding N.V. ADR
ASML,
-1.50%

 
71% $787.35 $797.78 1%
Infineon Technologies AG ADR
IFNNY,
-2.15%
81% $40.42 $48.56 20%
Source: FactSet

Keep in mind that analysts who work for brokerage firms use 12-month price targets to drive their ratings. One year is actually a rather short period for a multidecade technological transformation.

As always, if you see any potential investments of interest, you should do your own research and form your own opinion about companies’ business strategies and likelihood of continued success.

Don’t miss: 20 stocks for maximum growth as the world switches to clean energy

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