California has gone all in on electric vehicles; the California Air Resources Board has voted to ban sales of gasoline-powered vehicles by 2035, notes Roger Conrad, editor of Conrad's Utility Investor.
The new rules also target minimum electric vehicle market share of 35 percent by 2026 and 68 percent by 2030. And the 17 states that have tied their emissions standards to the Golden State’s will likely follow suit.
California’s “stick” to promote EVs follows the massive “carrot” of the Inflation Reduction Act, which includes unprecedented tax credits for purchasing new ($7,500) and used ($4,000) electric cars. There are also substantial incentives for US-based manufacturing of EVs as well as batteries, which could ultimately alleviate supply chain issues.
The prize of winning a healthy chunk of the US EV market is immense. And no one should underestimate the power of money to drive technology to resolve the industry’s commodity challenges. But there are still many bridges to cross before the US has real EV manufacturing capability.
And in the meantime, supply chain challenges along with commodity and wage inflation will continue to pressure companies’ margins. There’s also potential for a substantial drop in sales by early 2023, should Federal Reserve efforts to quash inflation result in recession.
As such, count me a skeptic on stocks such as Tesla (TSLA) that trade at more than 100 times trailing 12 months earnings. Fortunately, US electric utilities offer a far lower risk alternative for betting on deployment of EV charging stations.
California regulators have approved $1.4 billion of rate base spending on such facilities for its three largest utilities, including $800 million for Edison International (EIX). And that’s in addition to other grid-related spending needed to support the state’s projected demand for EVs.
Edison shares trade at 15 times expected next 12 months earnings, a substantial discount to 21 plus for the S&P Utilities Index. That’s largely because the utility is managing wildfire liability risk as it hardens infrastructure.
However, if California is to be successful taking EVs from 16 to 100 percent of its new car market in 13 years, this utility is going to have to pump tens of billions of dollars into rate base for needed infrastructure.
This investment will flow directly to earnings growth. And the result is ultra-reliable yearly dividend increases in the mid-to-upper single digit percentage range, even if the US economy hits a major speed bump. As a result, for investors looking at EVs, I recommend buying Edison, not Tesla.
