by Philip van Doorn
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 /zigman2/quotes/203558040/composite TSLA +1.27% and Nio /zigman2/quotes/204905836/composite NIO +0.20% 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 /zigman2/quotes/204359850/composite TSM +1.98% and ASML Holding N.V. /zigman2/quotes/210293876/composite ASML -0.72% .
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. /zigman2/quotes/203649727/composite INTC +4.49% , with annual sales of $77.87 billion) among the 30 components of the iShares Semiconductor ETF /zigman2/quotes/209255350/composite SOXX +1.61% , which tracks the PHLX Semiconductor Index /zigman2/quotes/210598361/realtime SOX +1.67% .