General Motors is no stranger to tracking stocks.
Andrew Harrer/BloombergMichael Burry’s bearish bet against Tesla didn’t work out, but he still believes some electric-vehicle companies are wildly overvalued, and that traditional auto makers such as General Motors and Ford Motor aren’t getting the credit they deserve.
He has an idea for how GM (ticker GM) and Ford (F) can close the valuation gap with EV makers like Tesla (TSLA), Rivian Automotive (RIVN), and Lucid (LCID).
“The way to solve this is for GM and Ford to issue tracking stocks for their next-gen vehicle operations, such as EV, robo-taxi, etc.,” Burry told Barron’s in an email exchange. “This is an absolute no-brainer.”
Burry is best known for a successful bet against the housing market ahead of the subprime mortgage collapse that led to the 2008-2009 financial crisis. He is a prominent character in Michael Lewis’s book The Big Short, as well as the movie with that title.
For much of 2021, Burry’s firm, Scion Asset Management, was positioned to benefit from a drop in Tesla stock. But regulatory filings show that as of the end of the third quarter, Scion had no bearish bets on Tesla stock. The same filings also show he didn’t have a position in GM or Ford.
His latest idea isn’t the first about how to close the valuation gap between EVs and car makers that rely on internal combustion engines. It isn’t even the first from this week. Data Trek’s Nicholas Colas, a former auto analyst, suggested Wednesday Ford and GM should spin off their EV businesses, given where stocks like Rivian and Lucid were trading.
At points this week, Lucid was worth as much as GM, and Rivian was worth as much as Ford and GM combined.
The idea for Colas, however, was theoretical. He didn’t believe the spinoffs would actually happen. Car companies are too complex, with many manufacturing plants doing several jobs for other factories in a network, not to mention legacy employee obligations such as pensions and healthcare benefits.
Both Ford and GM declined to comment on spinoffs this week. They didn’t immediately respond to requests for comment on the tracking-stock idea.
Tracking stocks might be more feasible options. “Tracking stocks are preferable to spin-offs in this case because the newer businesses would be able to access cheaper capital while maintaining the in-house advantages such as extreme manufacturing capability,” Burry said.
A tracking stock follows the financial performance of a specific business unit. They are separate securities. Shareholders of a tracking stock only have a financial interest in the division tracked, rather than in the entire business.
Tracking stocks aren’t uncommon. Liberty Media Chairman John Malone likes them. Liberty Media Formula One (FWONA), for instance, is a tracking stock that tracks, of course, the financial performance of the Formula One racing series.
And GM isn’t a stranger to tracking stocks. In fact, it did the first one ever, for Electronic Data Systems, or EDS, the company founded by Ross Perot. GM acquired it in 1984 and, essentially, kept EDS trading on its own as General Motors Class E stock. GM spun off EDS in 1996, and the business was sold to HP in 2008.
Cost of capital was cited as an issue by both Burry and Cola. Differences in cost of capital matter. Put it this way: A brand new manufacturing plant for Tesla would cost roughly 0.3% of its market capitalization. The same facility for Ford would cost it roughly 4% of its market cap.
If investors gave Ford, say, more credit for the worth of its EV operations, its market cap would be bigger, and a new factory would represent a smaller portion of its market cap. Financing growth would be easier.
The other, more obvious, reason tracking stocks exist is for valuation. When two business units have very different growth and profit-margin profiles, or are valued differently by different groups of investors, a tracking stock can make sense.
In the case of EVs, the valuation discrepancy is obvious. Ford hopes to be selling 600,000 EVs a year by 2023. That will probably be four times what Rivian will sell in that year. Rivian’s market cap, however, is about $125 billion, based on its fully diluted share count. Ford’s market cap, which reflects its EV operations and its $140-plus billion in annual sales, is $78 billion.
GM and Ford stocks were both down 0.4% in morning trading Friday. The S&P 500 was marginally lower, while the Dow Jones Industrial Average was off by 0.7%.
Write to Al Root at allen.root@dowjones.com
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November 19, 2021 at 11:27PM
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'Big Short' Investor Has Fix for Value Gap Between EV Stocks and Ford, GM - Barron's
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