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Stocking Up on Hybrids

August 01, 2004

By Isabelle Sender
The New York Post

The gas / electric-powered car of the future makes for a great investment today — but you have to look deep under the hood for the right stocks to drive your portfolio higher.

Last year, as gas prices skyrocketed, U.S. sales of hybrid cars spiked more than 28 percent, to about 43,000. But those vehicles were manufactured by Japanese companies, namely Honda and Toyota.

American auto makers have so far been left behind, analysts said.

"U.S. manufacturers don't make money on making cars as it is. Their money is made on financing cars," said Tobin Smith, founder of ChangeWave Research, whose firm has completed a consumer survey gauging demand of the hybrid trend.

"U.S. carmakers make even less margin on hybrid cars, whereas Toyota and Honda actually make a profit on cars. With demand growing and higher gas prices, it can't be good for the U.S. carmakers."

In fact, he warns that even Toyota, which markets one of the three popular models in the U.S. market, only actually breaks even on its hybrid Prius model.

"The Prius is great for dealers, but the car isn't making money for the carmaker."

On the other hand, the maker of the Civic hybrid, Honda, is characterized as "the best way to play" the trend in favor of the hybrid engine's proliferation.

Honda, which released earnings last week, is still "cheap, stronger than Toyota and on the higher end of unit sales," according to Smith.

"Purely from a valuation standpoint — what the company is worth today," it's a good investment, Smith said, pointing to its low stock price in relation to its high earnings.

"Honda's got upside over the next 12 to 18 months," he said.
But those who look to derive the most benefit from these new cars' popularity may very well be investors in hybrid parts and components, Smith suggests.
Another reason why Honda stands to benefit most from hybrid proliferation.

"They have a bunch of new cars coming out with hybrid systems and also have a deal for [making] fuel cells," Smith explained.

The stock closed at $24.27 on Friday, which is on the high side of its 52-week range.

And there are some other makers of hybrid systems whose stock price will be driven higher by the gas-and-electric vehicle.

One of the investment plays include electronic-component manufacturer Sanyo, which is the sole supplier of hybrid-power batteries to Ford. The U.S. car manufacturer is planning to roll out a version of its popular sports utility vehicle Explorer onto showroom floors in the fall of 2005. Sanyo closed at $18.82 on Friday.

BorgWarner's stock is also a good play on the hybrid story. The hybrid engine powertrain supplier to Ford — and potentially other carmakers for which it has bids out for such as DaimlerChrysler and Toyota, Smith said — saw profits rise 22 percent in the latest quarter, which it reported last week.

Its stock price in relation to its earnings is slightly higher than Honda's, but is still under 14. The stock closed at $47.19 on Friday.

Another way to leverage the popularity of hybrid cars lies in the fundamental engineering. Gas/electric powered cars need twice as much copper than a normal car, Smith explained. They also use more nickel. Both metals are used for their conducive properties.

Inco, a nickel and copper mining concern, which also has a low price-to-earnings ratio (14.02), owns about 30 percent of the world's nickel mines.

"They actually should benefit from growing battery usage," said Smith.

Inco's shares closed at $33.37 on Friday, midway in its 52-week price range.