With so much focus these days on next quarter’s earnings and whether a company will meet consensus numbers or not, it can be easy for many investors to forget what investing is meant to be about. While investing does of course mean many different things to many different people, a widely held notion is that investing is about determining (and buying) the expected long term cash flows of a company. In general, the expectation is that a company will go on earning profits forever. In reality this is not always the case. The introduction of newer, better technologies is one…
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With so much focus these days on next quarter’s earnings and whether a company will meet consensus numbers or not, it can be easy for many investors to forget what investing is meant to be about.
While investing does of course mean many different things to many different people, a widely held notion is that investing is about determining (and buying) the expected long term cash flows of a company.
In general, the expectation is that a company will go on earning profits forever. In reality this is not always the case. The introduction of newer, better technologies is one example of a situation where a company with old technology can find itself rendered obsolete!
Most readers will by now be familiar with the Tesla story. Tesla is an advanced electric-powered car maker, which appears to be successfully transitioning from a niche luxury car offering to a mass market production offering.
While Tesla is enjoying some first mover advantages there will of course be plenty of competitors in the electric-powered space. More importantly for Australian investors is that the success of Tesla highlights the impending disruption facing the petrol-powered motor car.
Here are six stocks which could face headwinds as a result of automotive technology advances.
One of the wonderful advances which is accompanying Tesla’s electric car is the installation of smart software which allows the car to drive itself largely autonomously. This effectively reduces human error rates and according to Tesla’s founder Elon Musk the Autopilot feature lowers the probability of having an accident by 50%. If this scenario proves to be true, this is great news for civilisation, but not such great news for a crash repair company such as AMA Group Ltd (ASX: AMA).
AP Eagers Ltd (ASX: APE) and Automotive Group Holdings Ltd (ASX: AHG) both hold enviable positions within the current domestic automotive market as leading dealership operators of major car brands. Tesla for one has chosen not to engage dealers, but instead to sell directly to the public in a break from the standard business model of most car manufacturers.
Given the likelihood that current incumbent manufacturers will be slow to evolve and not be major producers of electric cars in the future, it’s possible that more emerging car brands will also choose to sell direct to the public too.
Tesla’s electric car has an electric motor in place of a combustion engine. This means less moving parts, more efficiency and when combined with smart technology significantly less wear, tear and dings. This could all lead to less demand in the future for spare parts from providers such as Burson Group Ltd (ASX: BAP) and Super Retail Group Ltd (ASX: SUL).
Caltex Australia Limited (ASX: CTX) has significant experience and sunk costs in retailing fuel, but will it successfully transition to providing electric rechargers? It certainly has an impressive footprint of stations across Australia, but to date companies such as Telsa have chosen to operate their own charging stations. Coupled with the likelihood that advances in technology will make it practical for cars to be recharged at home and there could be long term structural problems for the likes of Caltex.
While the musings above may or may not prove accurate, one of the surest signs that a company may be a long-term loser from technology advances is if management dismisses any suggestion that electric vehicles and autopilot features will impact their business.
This “head in the sand” approach and failure to recognise the ever-evolving competitive pressures which all businesses face is a recipe for business failure.
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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. The Motley Fool Australia owns shares of Burson. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.