C (3:06)

I can't say it has, unfortunately.

B (3:09)

We gotta get you. It's probably a life skill you'll never use, but we gotta get you trained. Next, Next time you're in New York, I want you to stop by the house. There's gotta be a stick shift somewhere out there. A lot of these landscaping trucks will use a stick shift. We're gonna put you in one and we're gonna get you trained.

C (3:24)

Sounds like a plan.

B (3:25)

I'm not gonna be there, but I'll hire someone to show you how. So Nissan canceled the Versa because first of all, people aren't buying sedans anymore. Everybody wants sport utility vehicles. They want to sit up high and they want to have the option of all wheel drive. And manufacturers like that because they're moving away from low margin vehicles. They want to focus on these pricey, posh models and on the buyers who can afford them. Did you know? I'll throw out some factoids here. Buyers who make over $150,000 a year, they recently made up 42% of new vehicle sales and that's up from 29% just six years ago. So everything is skewing higher in income. B of A securities reports that many buyers making less than $75,000 have basically dropped out of the new car market. They're buying used or they're making their vehicles last for longer. And we're going to hear from Dan at Barclays in a moment about what that means for legacy carmakers and their shares. Here's why I'm curious about this now. Last year the carmakers actually had a great performance stock wise. Foreign, 53% last year. That's not counting dividends. And Ford was up 33%. And that compares with 16% for the S P 500. Car shoppers might not be loving this upscale move and lack of cheap vehicles out there, but car investors like it. Also, there was a push by the current administration to end tax credits for electric vehicles early that allow car makers to shrink programs that had been a drag on profits. And the President has proposed relaxing fuel economy standards. So at the start of this year, beefy trucks and SUVs with internal combustion engines, they were solidly back in favor on Wall Street. Now, of course, in recent weeks, the war in Iran has sent the price of crude oil Sharply higher and with it the price of gasoline. Have you checked out our Bob recently? Jackson, are you the kind of man if I throw out our Bob, you know what I'm talking about. Have you met our Bob?

C (5:38)

Oh my gosh, I wish. Is this Gasoline Futures?

B (5:43)

It's gas. It's. That's exactly right. Okay, It's. It's the most heinous commodity name ever created. It's an acronym. The thing it stands for is just disgusting to say and hear. It stands for reformulated gasoline blend stock for oxygenate blending. Never mind that it has blend twice in the name. It's got to be a lot of blending going on an acronym with the

C (6:10)

same word twice in the acronym. This should just be outlawed. That's terrible.

B (6:16)

Both of the Bs are for some form of the word blend. You really could have called it Arbo. Now that I think about it, our

C (6:23)

Bob sounds like a subreddit for people named Bob.

B (6:28)

Let's see.

C (6:29)

Oh yeah, there is one.

B (6:31)

I don't spend a lot of time in subreddits, but I gotta believe that's one of the bigger ones because there's a lot of bops.

C (6:39)

I'm really confused.

B (6:40)

Give me a couple of entries. I want to know what's on the mind of America's bops or, you know, the world's bops. Give me one or two comments. There.

C (6:47)

It just says Bob, period is the description. There's 40 weekly visitors and it's just images with the words Bob.

B (6:57)

I think that's the dark web. You're. You're on the dark web. Close your window. So basically, RBOB is gasoline before ethanol has been mixed in. There's a whole sciency reason why that makes it easier to send in pipelines and then you sell it to wholesalers and the ethanol gets mixed in later. But RBOB gives you a read sometimes in the futures market on what's headed for retail pumps. And the price of near term. RBOB futures were recently up 48% since the day before strikes in Iran began. Okay, so gasoline is up. We've all seen that at the pump. And the car stocks have started sliding. Ford was recently down 11% for the year, GM 9%. That compares with a 3% decline recently for the S&P 500. And so my question, my two main questions about the car business and about car stocks. Number one, might the industry's recent re embrace of internal combustion leave it poorly positioned now that gas prices are rising? And longer term, I'm wondering if investors should worry about new Car affordability, if that ever becomes a problem down the road, especially with the early signs of the rise of robocars, which we'll come to in a little while. For now, how about we start with my recent conversation with Dan Levy at Barclays. I saw a phrase in one of your reports. The phrase was ICE is nice. ICE in this case standing for internal combustion engine. And people were buying fewer electric vehicles. There was less of a push there. And so the car companies that were focused on the types of vehicles that customers are buying, maybe big pickup trucks, this sort of thing, that this was the year of profitability for combustion engines and these carmakers were poised to do well. Do I have that right? And is that still the case? Like what has changed now with the rising price of oil and gasoline and.

A (9:01)

Thank you for having me, Jack. Yeah, I think nothing yet. And I think that's what we're waiting to see, how exactly that plays out. The situation today as it stands is not all too different from where we were at the start of the year. We're looking at a market that's going to be down slightly, but still healthy mix that is generally favorable. And then maybe really the piece that was a bit of a question was on some of the commodity costs. I think the big question here with the oil prices is how sustained it is. And I think there's going to be two impacts. The more immediate impact is really going to be around the cost that these companies are going to incur right across the supply chain. We know that oil resin products are part of the bill of materials, the cost that auto companies incur. There's a transport freight logistics component as well that factors into it. We're seeing stress across the broader commodity complex that may start to hit the cost structures incrementally beyond the costs that have already been communicated by the companies. Yes, ICE is nice. These Companies struggled with EVs on profitability, and that was when you had a regulatory and policy environment that supported EVs. Now that it's gone, the companies are better suited to meet the natural mix of the market. And with oil prices higher, it does beg the question of does that start to change the mix dynamics? We think it's going to take some time. We think that structurally there are, there is a better preference for larger vehicles, pickups, SUVs. But we also know there's a correlation historically between higher gas prices and negative mix.

B (11:05)

Let's, let's say that I'm a car shopper now and I was in the market and I had my eye on one of these, you know, these big muscular pickup trucks or SUVs. But now I'm looking at what's going on in Iran. I'm saying, wait, wait a second. What if the price, what if the gasoline price stays this high or moves higher? Maybe I should get something that's more fuel efficient. Do they even have the mix of vehicles that might appeal to me? How are the carmakers positioned? Do they have the right stuff to sell if customers end up wanting something that does better on mileage?

A (11:36)

Well, they still have the EVs, right? I think that's clear is you still have EVs, you do have more efficient versions of some of the ICE vehicles that are out there. You know, I think what's still being developed and we have some of it in the market, but there's probably more to come is hybrids, right? Whether it's mild hybrids, strong hybrids, or even some of the electric hybrids, whether it's an E rev, which is effectively a vehicle with an electric motor but that has a gas generator or a plug in hybrid type vehicle, right? That's the area where I think there is maybe there could be some incremental demand and where capacity has to be adjusted somewhat. But for the most part there is some ability to meet, you know, the needs of consumers that want a more fuel efficient offering. There's probably more to come.

B (12:31)

So there's nothing. You have to keep an eye on it. You have to watch to see the numbers that come in. But there's nothing so far that suggests to you, whatever your thesis was at the beginning of the year on how these carmakers are going to do on sales. There's nothing that suggests to you that, that we should be gloomier because the price of the pump is up 60 cents or whatever it is a gallon. So far the outlook is still okay for the carmakers.

A (12:56)

As of now, there is no change. But again, I think that we're watching this carefully for the stocks. We know that auto stocks are very levered to macro. In fact, what we said in one of our reports is autos is frequently a sell first, ask later sector so that maybe the impact to numbers right now is more modest. We understand why the stocks sold off initially on this. I think the bigger question is at what point, if it does, does it start to flow through to changing vehicle mix considerations?

B (13:34)

I want to shift now from the price of gasoline, the price of oil to affordability. Plenty of people have been shocked by, you know, maybe it's just kind of happened gradually or they just find themselves paying A lot more for a car than they used to, on their monthly payments, on their insurance, on their repairs and so forth. There's a lot of discussion on Wall street about the K shaped economy. This idea that higher income folks have it easier and are responsible for a large portion of the spending right now, lower income folks have it tough. Is that a concern for a car investor, do you think? I mean, first of all, just financially, do car companies do worse because of that or not so much because they don't, you know, because they're focused now on the high end of their model ranges and that's a lucrative business for them. What do you think it means for carmakers?

A (14:23)

This has generally been favorable. Okay. And I can look at it in a couple of ways the way that I would sort of think of the industry construct. If I look pre Covid versus today. Pre Covid, we sold roughly 17 million units a year in the U.S. average vehicle prices were 32, $33,000. Today we're roughly a 16 million unit industry. But average vehicle prices are 45, $46,000. So effectively you traded away a million units of annual volume in the U.S. for prices that are 12, $13,000 higher. Now automakers obviously aren't pocketing all of that 12,000 to $13,000. Right. We also know that inflation in that period has taken a toll, right. That the cost of building a vehicle is certainly much higher. There's a mix consideration in that as well. Right. The higher price does is partially driven by increased mix. But generally speaking, auto companies today have shifted the focus a little bit away from pushing volume as much as they can to really trying to get more price out of, out of vehicles. And that's generally what we've seen. Now I think people are, they've generally been astonished as to how resilient prices have been holding in at this 45, $46,000. And just to provide context, right, the 45, $46,000 that you at the peak of the supply constraints in 20, 21, 22, when you had these crazy dynamics of you would go to a dealership and you know, the price that was advertised in the newspaper or in the email, the dealer would say, hey, I'm going to charge an extra $10,000. Right. At that point in time, average prices were call it peaked at $47,000. We're actually not all that far off of that. Right. So even for as much as the supply has normalized, we've still seen price hold in. There is a mixed component of that. In the last year they've passed through some of that tariff cost and the volumes have generally done okay. Right. If I just think about last year, the way that the year played out, it was really, I think a testament to the industry that we started the year expecting 16 million units of volume and prices down 2%. And we ended the year with volume at 16.3 million units and prices up a couple percent roughly. We had better price, we had better volume. Some of that volume was admittedly a pull forward. There were some EV dynamics. But I think you are seeing a more resilient new car industry and this K shaped economy. Right. What you're talking about, if I just look where we were call it seven years ago, you had effectively a third of new car buyers were $200,000 plus household income. And today it's roughly half of new car buyers are $200,000 plus household income. On the flip side, sub $100,000 household income used to be two thirds of the market and now it's below 50%. Obviously incomes have increased. Right. So there's some inflationary element of that. But I think the point is, is it is shifting the dynamic of the new car market somewhat to be one where not every consumer is buying a new car. Some can buy used. And just one last look at the used market. You're seeing this as well, that used prices have held in and then even the life of vehicles is getting extend this notion that hey, like there weren't many cars that you would extend past 200,000 miles. Now you have, you frequently see cars that are, you know, extended past 200,000 miles. Better cars, but also the economics have changed.

B (18:19)

Thank you, Dan. I did want to touch on Tesla. Dan has some thoughts on that too. Let's take a quick break. Welcome back. We'll talk Robocars, Tesla, and we'll hear a little more from Dan. Welcome back. Jackson, you've never touched a stick shift. You've never touched a clutch pedal.

C (18:43)

Yeah, yeah, that's right. That's right.

B (18:44)

I'm not manual shaming you. That's all right. But have you traveled yet in a Waymo. Have you Waymoed?

C (18:51)

I have Waymo'd it a couple of times.

B (18:53)

How's that? How's, how's the experience?

C (18:55)

It's pretty great. I mean they can't drive on freeways in la, so I'll only take them when something's close by.

B (19:04)

Your theory by the way, is that people who don't live near one of these big early Waymo markets, there are 10 of them so far. There are plans for 22 more. So people who aren't in and around one of these big cities don't understand how big this thing has become in its early days. What are you seeing, where are you and what are you seeing?

C (19:25)

So I'm on the west part of la, so Los Angeles, Santa Monica, and I kid you not, 1 in 20 cars over here is a self driving Waymo.

B (19:35)

That sounds crazy.

C (19:36)

And so you just see these things. These things are everywhere. It's not even like a big moment when you see them.

B (19:42)

Have you been out there with like an umpire's counter counting every 20 cars that goes by?

C (19:47)

You know, maybe I should go out there tomorrow morning. But that's just what it feels like. And I think it's especially the case for me because I live like down the street from where all the Waymos live.

A (19:58)

We all go back to charge at

C (19:59)

night and it's only a few.

B (20:01)

You're in a Waymo.

C (20:02)

But it feels like they're freaking. They're everywhere. Yeah.

B (20:05)

Many, many years ago I lived in a part of Queens that was right near a taxi garage, so it looked like every other car was a yellow cab. I used to go out to the street and if I raised a hand, you'd have like almost a collision with 17 cabs pulling over to pick you on their way into the city anyhow, so.

C (20:21)

So yeah, they're, they're everywhere. I've ridden in them a couple of times. I, I ride my bike by them very often and they're very courteous. They try to keep good distance from the bikes. They never try to run you over.

B (20:32)

And you, you bully them. You bully them, don't you?

C (20:35)

I bike in front of them, bike very slowly.

B (20:37)

You bike, bully the Waymos.

C (20:38)

You know, it's a really nice experience. It's really consistent. They're really nice cars and they get you to where you need to go and you could play your own music the whole time. So it's a, it's fun.

B (20:47)

I'm giving you some numbers. This doesn't quite back up your, your 1 in 20 claim, but this is something more fact. It has to do with San Francisco. In San Francisco, which is another, you know, early adopter city. Waymo has taken a 1/4 share of the ride share market. That means it has passed Lyft, hasn't passed Uber yet, but it's past Lyft and prices for Waymo's are 15% to 20% higher than those of Lyft and Uber. And they're becoming more competitive. So this Thing still has yet to scale up if it's already taken that kind of share in San Francisco. Imagine when the prices are, you know, on the same level as Uber and Lyft, or if they even drop lower because you're not paying a driver.

C (21:35)

Yeah, and they're moving from these Jaguar cars to, I think, cheaper zeekr Chinese cars too.

B (21:42)

I think about this because I read a recent report from B of A securities. They had a big global automotive shindig where they spoke with dozens of executives and experts and they came away with a generally upbeat outlook. They said that geopolitics have not yet cut into car demand. And they said that demand was still being supported by wealthier buyers. But they also mentioned that buyers have gotten older. On average, the average new car buyer is now around 50. And I saw that that's up from 43 in 2000. So the average car buyer is getting older. It makes me wonder. A company like GM is making tons of money right now. For people who haven't looked recently, the free cash flow for GM, it's pegged at almost $10 billion this year, which is around 15% of its stock market value. By next year, it could rise to 19% of GM stock market value. So it's making loads of money. But that fact about the average age of new car buyers, it just makes me think of the cable TV business. Remember how for years everybody said no cable TV subscriptions are fine. You know, people are experimenting with cord cutting or whatever, but the numbers still look fine. And it turned out in hindsight that young people leaving cable, that was the early warning sign. The if you could almost slice the demographics by age group. And older people still to this day are keeping their cable. But the very young left and the next group up from that left. And now we see that falling cable subscriptions have been a big problem for the industry. I don't have reason to believe it's going to be the same thing for cars, but it does make me a little cautious to see that this youngest cohort has really pulled back on car ownership. Maybe it's not affordable for them, or maybe they just have other options that young people didn't used to have, like using an Uber. Ubers aren't cheap, but if you don't need that many rides, maybe that compares favorably with owning a car and paying the insurance. So I wonder about these two forces. GM making all this money and Waymo just starting to get rolling. But what Waymo really makes me wonder about is Tesla. I think that Tesla has pulled off an Astonishing feat. And it is definitely not related to selling cars. The company makes most of its money selling cars and investors don't seem to have the slightest interest in that business. And the trends there are not good. And yet Tesla still has a stock market value of around one and a half trillion dollars. It's the eighth largest company in the S&P 500. There's an analyst over at UBS named Joseph Spack. He wrote a report recently. He predicted an 18% decline in deliveries quarter over quarter. That's a big drop. And he wrote in his report, do deliveries even matter for the stock price? Probably not. At least not like it used to. How is this possible that investors don't care? Well, of course, Tesla is squarely focused on businesses that it really has yet to truly launch. And these are robo taxis and humanoid robots. And sentiment around these have been driving the stock. And the problem now for Tesla, of course, that stock has been an amazing performer over the past decade, but so far this year it's down 15%. The problem for Tesla, according to UBS, is that investors are starting to say that the updates that the company puts out on these new ventures, they've gotten slower and more muted than investors are expecting. And at the same time, Waymo is scaling and Nvidia is looking to provide robo taxi brains for car making partners. UBS writes, there is growing sentiment that Tesla may not sustainably differentiate on robo taxis. And as business problems go, I have sized up a lot of businesses over the years, seen a lot of business problems, some more solvable than others. I'm not sure I've ever quite seen one like this. How do you fix a company that's falling behind in a business that it has not yet really entered? Maybe those humanoid robots will have some ideas. Or maybe I've got it all wrong. Maybe Tesla's just lying there waiting to pounce. Crouching tiger hidden Tesla. And it's going to jump into this market in the year ahead and it's going to dominate. I just think it's an awful lot of faith that stock price. Anyhow, Dan at Barclays has a neutral rating on Tesla. I asked him about his view, especially in light of the fact that he's positive on gm. He has a buy rating there, so he must be pretty optimistic about car sales there for the foreseeable future. And Tesla doesn't even seem to care about car sales anymore. Let's hear the last bit of that conversation. If the car makers are doing well with prices this high, and if there are Certain, you know, if there's a portion of society, they used to be car buyers, now they feel closed out of the market. What happens with them? I guess some of them buy used cars, some of them hold onto their cars for longer. I hear anecdotally about some people deciding, hey, wait a second, I've done the math on taking an Uber to work and maybe we'd be better off there. Do you see sort of longer term shift in what car ownership looks like in America?

A (27:06)

I think car ownership is still very much intact. I think that the longer term question is actually around autonomous driving. Right. You know the fact that this is a reality now, right. You can go to San Francisco or LA or Phoenix or Austin and, and you'll see waymos driving around with, without a driver. And in these cities at this point, this is a comparable alternative to Uber. Why do I bring that up? Because the long term vision of autonomous driving bulls was that once you can fully scale this up, you can drive the cost per mile down dramatically. And as you start to get a much lower cost per mile, that's when it starts to change some of the dynamics around personal vehicle ownership. Now look, we're nowhere near that yet right now I think the cost per mile to operate a vehicle personally is something around 70 or 75 cents. Right. That's, you know, a fraction of what it is for an Uber. But if autonomous is correct and this continues to scale, you are going to start to see the economics change. We don't think that's going to be in the next couple years, but you start to see that AV is a reality and that could be at some point in the future.

B (28:24)

I want to finish by asking about the car companies that you cover. First of all between Ford and gm. Where are you on your ratings on those stocks and how do you feel is one of them your, your favorite moving forward?

A (28:40)

Yeah. GM is, is our favored name. We're equal weight on Ford, we're overweight on gm. The GM thesis I think is, is, is two points. Simply one is that SAR pricing, the US market has generally held in and been resilient. Now look, we need to see what happens with mix for people, for people

B (28:59)

listening and saying what's this sar? That's, that's the number of cars sold each year, correct?

A (29:04)

Yes.

B (29:04)

The annual seasonally adjusted something something. Yeah.

A (29:09)

And just remember, these companies get a disproportionate amount of their profit from trucks and trucks have held in very well. It's a three player oligopoly effectively in the large pickup Market between Ford, GM and Stellantis, which is the Ram brand, trucks are doing well. The core market is doing well. The second piece, GM and Ford and many of these companies had been losing significant amounts of money on their push toward electric vehicles, which was a market push, but also was in many ways a regulatory push. This was a compliance calculation. And with the policies and regulations changing dramatically, they can now narrow some of those losses and let the push of EVs be much more directed by where the natural demand is. And so strong market plus ED loss is narrowing plus also some mitigation actions on tariffs which are continuing to play out is very favorable. Good free cash flow buying back. That's generally why we like gm. Ford has a similar story, but I think there's more of a cost execution element. The free cash flow is not as good.

B (30:21)

I just thought of that movie from many years ago, who Killed the electric Car or something like that. Do we need a sequel to that or is the electric car still alive and well even without the regulatory treats the perks? Is that a market that's going to stabilize and grow from here in the US or where do things stand there?

A (30:40)

Over time it will. I think the companies recognize that from an existential and strategic standpoint, they still need to have an answer to the question of how to electrify. This is obviously happening in a much more aggressive fashion in the in the rest of the world. You know, if we just compare and contrast, while EVs are only call it under 10% of sales in the US in Europe it's roughly a quarter and in China it's more than half of the new cars sold are EVs. We know that sort of the winner of the global EV race actually has been the Chinese automakers and they've had a lot of exports. So I think the US automakers know that while they're focusing on the core market or focusing on trucks, they still need to have a long term answers. They have to have product, they have to have a technology answer. That's where you see Ford for instance, that even after pulling back on the regulations, they are working on a low cost electric vehicle with I think it's roughly $30,000 starting point that's going to come out in the second half of 2027, that they are aiming to change the cost dynamics here because they know that to make money here they have to be much better on cost. The challenges on EV were just as much a challenge on cost as it was underlying weakness in demand. And they've got to figure out the cost dynamics in a better way, similar to what the Chinese and Tesla, what they've done.

B (32:10)

When I look at what I'm hearing from Tesla, it just seems like this is a company that the business of selling cars has become kind of an afterthought. And they're squarely focused on this future of robo taxis and of course humanoid robots. And it makes me wonder. Those goals seem very ambitious. How are those compatible with what the legacy car makers are trying to do? Is this a situation where only one of these two can be right? If Tesla's doesn't seem that interested in selling cars right now, and the legacy companies are all about selling cars, what happens? Does one of these groups get proven right and the other proven wrong or what happens from here?

A (32:46)

They may not necessarily both be wrong. I mean, there is maybe a longer term question on what happens with the legacy automakers in a fully autonomous world. Their answer to that is more so we have to address autonomy from a personal, a consumer standpoint, not what Tesla is doing, which is putting vehicles out in a fleet and having a robotaxi operation. Look, I think these sets of companies are focused on different things. The legacy automakers, while they are pushing forward still on technology, on EVs, on software, on AVs, I think they are doing it with the experience of the last few years where there were maybe some missteps, where there were, you know, some, some challenges and they are trying to be mindful of, yes, we do need to push forward, but there also needs to be a business where we're generating a steady stream of free cash flow. Tesla doesn't care about the vehicle business as much. You know, when they got rid of Model S and X, it was a very symbolic baton, Pat, to say that the models that made them this disruptive force in auto are now being phased out as they go to this next phase of AI. Humanoid robots, robo taxi, autonomous driving. These are things that the legacy automakers really aren't interested in. The bread and butter of the legacy automakers for GM is still very much US Trucks. I don't think that's changing anytime soon. That's still a cash cow. It can push forward on the rest of technology. Tesla, it's really all about the push into AI. And if they're operating at negative free cash flow for the time being because they have elevated capex, that's okay, because it's about funding that future growth.

B (34:31)

And where's your recommendation on Tesla?

A (34:33)

I'm equal weight on Tesla. I would just point out, I always like to give this statistic. Tesla is one of three companies in the world that is $100 billion plus valuation but also trades in excess of 100 times earnings. Which really tells you how critical narrative is to the company and how much it's about showing they can push forward in AI as opposed to the near term earnings stream.

B (35:01)

Thanks again Dan and thank you all for listening. Jackson Cantrell is our producer. He's a clutch player even though he's never used a clutch. There's way more to him than meets I. Forget it. You can subscribe to the podcast and Apple podcasts, Spotify wherever you listen. If you do write us a review. Please. You gotta stop telling Jackson how much you love him. It's going to his head. Frankly. You have fanatical followers out there Jackson. You're basically Beyonce at this point.

C (35:34)

Shout out to my beehive.

B (35:37)

See you next week.