Carmakers Are Drowning in Cash
More stock buybacks in the cards after another profitable year for companies that make gas guzzlers, but that won’t cure EV-related pains
By Stephen Wilmot
The traditional car industry had a highly profitable 2023. PHOTO: CHARLES KRUPA/ASSOCIATED PRESSMost carmakers are ending the year with lots of cash and lots of worries.
Share buybacks are an antidepressant, not a cure, but they are better than nothing.
It has been a highly profitable year for the traditional car industry.
Production recovered following the microchip-related supply constraints of 2021 and 2022.
Having previously been starved of inventory, consumers and fleet owners bought new vehicles despite higher interest rates.
Globally, sales are on track to rise 10% this year, according to forecasting firm GlobalData.
But you might not have gotten that upbeat message by reading the news or watching U.S. stocks.
While 2023 will bring record revenue to almost all big manufacturers, 2022 was better for their profit in the U.S. thanks to sky-high vehicle prices.
These are now falling for the first time in at least a decade, while sales incentives are rising.
Also, Western companies such as General Motors, Ford, Volkswagen and Mercedes-Benz that bet heavily on electric vehicles took a strategic hit in 2023 after Tesla, the technology’s pioneer, started a global price war.
The economics of EV investments, never great, got worse.
The net result: While automakers’ balance sheets are bursting with cash after three record-breaking years, the outlook is so unpromising that investors largely want nothing to do with them.
Buybacks and deals are two potential answers to this conundrum.
GM has already kicked off the former trend with the announcement of a $10 billion accelerated buyback, and it probably has further to run.
The kind of large-scale acquisitions seen in the oil-and-gas industry in 2023 following its own cash bonanza seem less likely in the world of gas guzzlers, but make for an interesting “thought experiment.”
That is what Bernstein analyst Daniel Roeska, in a note earlier this month, called the idea of German giant Volkswagen or Chrysler’s owner Stellantis buying French carmaker Renaul.
Both have the resources: Stellantis will have the equivalent of roughly $15 billion in surplus cash at year’s end and Volkswagen a bit under $11 billion, according to Roeska’s estimates.
But they wouldn’t even need the money, as Renault would essentially pay for itself.
Its market value, currently equivalent to $12.4 billion, has long been more or less covered by the company’s net cash pile and its shares in Japanese carmaker Nissan.
That doesn’t necessarily make a Renault takeover an attractive or even realistic prospect for Stellantis or Volkswagen, given the antitrust questions it would raise.
But it does highlight the valuation dysfunction that pervades the legacy automotive sector.
Renault is valued for less than the sum of its most liquid parts alone.
GM’s big buyback—equivalent to roughly a quarter of its market value when announced—was a practical if uninspiring response to excess cash and a weak stock price.
Stellantis seems the most likely company to follow suit, though it probably won’t take GM’s headline-grabbing path of an “accelerated share purchase,” which means the company can’t reverse course if economic conditions deteriorate.
Chief Executive Officer Carlos Tavares, the architect of the acquisition machine that created today’s Stellantis, is cautious as well as efficiency-obsessed. Stellantis is one of the few automaker stocks that has made meaningful gains this year.
Ford had $9.3 billion of net cash at the end of the third quarter.
At a Barclays conference after GM’s buyback, though, Chief Financial Officer John Lawler tamped down any expectations that Ford might go beyond its usual commitment to return up to half of free cash flow.
His guidance for 2023 puts Ford on track to fund its 15 cents a share quarterly dividend, but not much more.
Volkswagen is similarly dividend-focused.
Both companies are controlled by families, which tend to be more interested in income than juicing the stock price.
As so often, Tesla is a counterpoint to the traditional industry: Its earnings per share are expected to fall by about a quarter in 2023 as a result of its EV price cuts, yet investors have flocked to its stock as a play on artificial intelligence.
A year ago, when Tesla’s stock was under pressure, CEO Elon Musk discussed spending some of the company’s cash on buybacks.
The subject has since fallen off the agenda.
Tesla is an extreme case, but it does serve as a reminder that growth hopes are the only lasting fix for traditional automakers’ low valuations.
That means persevering with EVs even in the face of brutal competition and rapid technological change.
Buybacks can give shares a short-term lift—they already have in GM’s case—but they are no substitute for making cutting-edge products at sustainable margins.
Only success in the growing EV market seems likely to convince investors that the giants of the 20th-century industry can thrive through the 21st.
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