Stocks That Will Profit From the Electric Car

PITY AMERICA'S CAR sellers. They must think back 15 years to recall a worse six-month stretch than the first half of 2008. Blame falling house prices or layoffs, but mostly, blame costly gasoline. Thirsty pickups and sport-utility vehicles are backed up at the lots, their $5,000-cash-back offers ignored. Compact sippers are selling well enough, so long as they can be found. Toyota over the summer had a six-month waiting list for its hybrid Prius, which uses part-time battery power to burn less gasoline. In polls, four out of five consumers say they'll consider buying a hybrid next.

I find that remarkable because today's hybrids aren't all that impressive. The Environmental Protection Agency calls the Prius the most efficient car sold in America. It travels 45 miles or so on a gallon of gas. As a teen I owned a 1980 Volkswagen Rabbit that did about five miles better than that on a gallon of diesel, with no battery assistance. Thomas Edison owned several cars that ran on batteries alone. His Bailey Electric Phaeton could manage 100 miles of clean, quiet driving on a single charge. In fairness to the Prius, the Bailey moseyed along at just 20 miles per hour. But then, it was made in 1909, a half century before America had interstate highways.

What's past is prologue, as Shakespeare wrote. In 1900, 28 percent of cars produced in America were electric. Cheap gasoline, weak batteries and limited electricity (just 2 percent of homes were wired in 1900) did in the electric car by the 1920s. Today just the opposite is bringing it back: costly fuel, powerful batteries and ubiquitous electricity. General Motors, Toyota and Nissan have announced plans to sell battery cars that recharge from standard electric outlets by 2010. GM's Chevy Volt is expected to run 40 miles on a single charge, and more than 300 miles if its gasoline engine is tapped to recharge the battery. Hence drivers with short commutes will use no gas, while those with long ones might get 100 miles to the gallon. The Department of Energy is already studying the implications of plug-in cars grabbing a 25 percent share of the market by 2020. Investors ought to consider that, too.

Some skepticism is warranted. After all, didn't the 2006 documentary Who Killed the Electric Car? teach us that carmakers don't really want us to plug in? The film focuses largely on the first modern rechargeable, the General Motors EV1, leased (but not sold) to just over 1,000 customers starting in 1996 and discontinued in 1999. The last of the cars, the story goes, were snatched from adoring leaseholders in 2003 and sinisterly sent to the crusher. But the EV1 was a tiny two-seater that cost far too much to build; estimates run as high as $80,000 per car. The purchase price implied by GM's lease was around $40,000. The forthcoming Chevy Volt will seat four and is expected to cost about half as much to produce — still pricey but perhaps economically sustainable. Early reports suggest it will recharge faster, hit a higher top speed (120 mph) and, with its gasoline reserve, travel farther between charges.

The Volt and its pricey peers will likely appeal first to well-to-do greens. But as much as $15,000 of the cost of the first plug-ins goes toward their lithium-ion battery — a larger version of what powers laptops, essentially. As the prices for those batteries continue to fall, budgeters will bite. Chest-thumpers may beat them to it after learning that electrics can deliver peak torque from the moment the accelerator is pressed. The Tesla Roadster, an all-electric sports car pioneered by PayPal cofounder Elon Musk and already in (costly) production, reaches 60 miles per hour from a dead stop in under four seconds. That's as fast as a Ferrari. The number of hybrid models is already expected to jump from 17 to 60 by 2011. As they sprout plugs and battery prices fall, gasoline tanks will shrink. Whether or not they disappear altogether, more of America's car power will be outsourced from under the hood onto the electric grid, where it can be produced more efficiently and cheaply. Some of the companies poised to profit are alternative-energy names with high-flying shares, but others are old-economy stalwarts with humbler valuations.

Consider Arch Coal (ACI). A rise in demand for electricity will favor coal, which produces half of America's electricity, long before it favors wind or solar power, which are still more expensive (so long as the pollution cost of coal is ignored, which it is in most of the world). America, as it happens, is coal's Saudi Arabia. Profits for Arch are expected to double this year and next. Meanwhile, a fast build-out of coal plants around the world (China and India are putting up about one a week) should continue to pay off for plant engineers and builders like McDermott International (MDR).

Power generators aren't the big-dividend sleepers they once were. The Dow Jones utility index has more than doubled in five years, versus a 25 percent increase for the Dow industrials, which means the two now have similar dividend yields of around 3 percent. Some utilities are struggling to pass higher fuel prices on to customers due to pricing regulations, but FirstEnergy's (FE) cluster of utilities serves Ohio, New Jersey and Pennsylvania, states that already have market pricing or are getting it soon. The company gets more than a third of its power from nuclear plants and sources a small but growing portion from Pennsylvania wind farms. Profits are expected to be mostly flat this year but are forecast to rise 26 percent next year as rate increases take hold. In the meantime, shares yield 3.3 percent.

I'd stay away from the carmakers themselves. GM has the most to gain. It's selling the mine's-bigger-than-yours Hummer line, and its top product guru reckons four out of five vehicles will be hybrids by 2020. But the company is losing a worrisome amount of money right now, and the books could get far worse before they get better. Under the hood, however, things look more promising. BorgWarner (BWA), a maker of efficiency-driven components like transmissions and turbochargers, already supplies parts for hybrids from Honda, Toyota and Ford.

Matsushita Electric (MC) — which will change its name to Panasonic on Oct. 1 — has paired with Toyota to make nickel-metal hydride batteries for the current Prius and will soon make its lithium ion batteries. I know: You're reading this for electric-car stocks, not giant television companies with small battery units. Most of the smaller firms are too expensive for my taste, though perhaps not for yours. Ener1 (HEV) uses nanotechnology to solve some early lithium-ion battery problems (laptops catching fire, for example). It should begin making money next year, starting with a $70 million supply deal with Norway's Think electric car, and is uniquely positioned as the only American supplier of advanced lithium ions for cars. Chile's Sociedad Quimica y Minera (SQM) has a booming fertilizer business and is also the world's leading supplier of lithium — something investors are wise to, judging by its stock's 60 percent gain this year.

Finally, for something far more conservative, consider that plug-ins might spark an overall turnaround in car sales, especially if owners trade in more frequently to capture those initial steep performance gains. That would bode well for makers of general car components. Sweden's Autoliv (ALV) is the world's leading patent holder and supplier for seat belts and airbags and is priced as though the car itself is dying, at just nine times earnings. It's difficult to imagine that drivers will want fewer safety gadgets in tomorrow's electric cars.