Holly Black: Welcome to Morningstar. I'm Holly Black. With me is Richard Hilgert. He is an equity analyst at Morningstar. Hello.
Richard Hilgert: Hello, Holly. How are you?
Black: I'm good. Thank you. You've just been doing a deep dive into the autos sector. Can you tell us what are some of the key findings from your research?
Hilgert: Okay. So, this is an annual piece that we do. It's an automotive observer, that's subtitled Moats, Motors, and Markets, and we update it annually. So, in the moats section, we talk about what the economic moats are in the sector across automotive manufacturers and suppliers. In the motors section, we discuss the individual stock ideas that we like for the coming year. And in the markets section, we talk about our forecasts for global light vehicle demand.
Black: So, let's think about markets first and it's been a really difficult one for these companies and this sector. Why has the auto sector been hit so hard in COVID-19?
Hilgert: The sector was hit hard because we had many shutdowns originally across numerous regions and countries. So, because of that we saw just horrendous performance obviously in the second quarter, but we also saw some of these companies really rebound very nicely and really had several different cost-cutting ideas and methods. And by the third quarter, with the rebound, we really saw some excellent recovery in the sector and then, by the fourth quarter, that recovery continued and we're expecting that to go on into 2021 with the exceptions that there is a lot of uncertainty still out there from COVID-19.
Black: So, a huge theme for this sector at the moment obviously is the transition to cleaner energy and electric vehicles. How do you think autos companies are handling that?
Hilgert: Well, I think, that they're handling it better than in some instances what the market thinks they are handling it. We've recently seen some rallies in Volkswagen and Daimler, for example. The SPAC deals, the Special Purpose Acquisition Company, deals that we've seen in the marketplace for electric vehicle disrupters, new companies, startups has really had outrageous valuations for a lot of these companies, and Tesla has had a very high valuation in the marketplace as well. And the auto manufacturers are not getting any credit whatsoever for their vehicle electrification because they're traditional automakers. They are the old guys. They're not being disruptive enough.
And I completely disagree with that assessment. I think that there is dramatic change coming down the pike. We're seeing right now a lot of launches of electric vehicles coming from the traditional automakers. So, I think that BMW, for example, we've got a fair value estimate of €121 on that stock. Even though the stock has rallied from €70 to €80 here just within the last couple of weeks, we still think that there's plenty of room to grow and that investors, long-term investors would do well to look into this narrow moat rated stock.
Black: So, speaking of narrow moat rated stocks, what are some of your top picks in the sector?
Hilgert: Well, besides BMW, we also like BorgWarner, which is also another play on electric vehicle technology. They are an automotive parts supplier for complete powertrain for the electrified side. On the internal combustion engine side, which is the reason why the stock has been discounted, they still have that traditional product area where they are supplying internal combustion engine parts like turbochargers and fuel injectors. I think investors – I think that the market has discounted it because it doesn't understand that those technologies can continue to increase penetration, but it's going to be in a declining total addressable market.
Black: Richard, thank you so much for your time. For Morningstar, I'm Holly Black.
