Another Way to Profit from Electric Cars

Here’s a case of a villain turned good. One of the most polluting resources in use – coal – is being used to make our air cleaner. In February of this year, German automaker BMW announced plans to use more carbon-fiber-reinforced-polymer (CFRP) in its new electric hybrid vehicles – the i8 sports car and the lower-end i3 city car.

Following up on its promise, BMW has recently committed to investing $200 million in its American partner – SGL Carbon SE (OTC: SGLFF) – which builds a variety of BMW autos in its Moses Lake, Washington, factory. The investment will triple SGL’s carbon fiber output to meet BMW’s growing consumption of the material that is revolutionizing auto manufacturing.

Just what is CFRP, and why is BMW going bonkers over it? Can investors cash-in on this new wave in automotive manufacturing?

Carbon Fiber Makes High Performance Enviro-Friendly

As federal and state governments around the world continually lower their allowable auto emissions limits, automakers are pressed to find ways of making their cars more fuel efficient without compromising performance.

Installing hybrid power systems that switch between gas and electric power is one solution. But the batteries add weight and shrink cabin volume, simultaneously worsening performance and reducing passenger comfort. What is needed is a material that has a high strength-to-weight ratio that can provide the same strength as steel while weighing much less.

For a while, aluminum answered that call, matching steel’s strength at just 0.7 times its weight. But with advances in the manufacture of graphite and other carbon fiber materials, CFRPs can match steel’s strength at just 0.5 times its weight.

At the heart of this revolutionary material is the carbon atom, which is quite strong for its relative atomic weight. Much like cotton and wool are stretched and spun into thread, crystals of carbon atoms can likewise be arranged into thin strands, or fibers. These fibers are extraordinarily strong because of the way carbon atoms lock together tightly, much like a chain-link fence.

Threads of carbon fibers can then be woven together into a carbon fabric of sorts, much like cotton and wool thread can be woven into cloth. The strength of this carbon fabric can be increased by braiding its fibers into a weave. In turn, this carbon fiber weave can be made even stronger by “painting” or pouring liquid resin over it, such as Epoxy, filling all the pours much like dipping bread into battered eggs when making French toast.

The end result is an incredibly strong, light and flexible carbon fiber mat, which can be stacked in layers to fill any mould, which can be further bonded and strengthened by pouring more liquid resin throughout.

Until now, most carbon fiber compounds and their related graphite compounds have been used on a relatively small scale, such as in sports equipment from hockey sticks to tennis rackets, where strength and light-weight are equally desired. But BMW is planning to use CFRPs in a way they have never been used before – to replace plastic, aluminum and even steel in the manufacture of automobiles.

BMW’s Deal with SGL

BMW’s $200 million investment in SGL Group’s Washington State plant will enable the factory to increase its carbon fiber output from the current 3,000 tons to 9,000 tons per year, allowing the plant to triple the i8 and i3 assembly lines from two to six.

The automaker’s new $130,000 high performance i8 gas-electric hybrid shown below will soon be seen on the streets of California in a few weeks’ time, its emissions well under the state’s low carbon emissions limits, and its performance well above drivers’ high expectations.

Sources: AutoReleased.com / SenseTheCar.com

Weighing in at 3,274 pounds, the i8 is around 1,000 pounds lighter than Tesla’s aluminum-made, fully electric Model S. BMW calculates the i8’s fuel efficiency at 90 miles per gallon.

But BMW hasn’t forgotten about the rest of us. It’s more affordable $41,000 hybrid i3 city car shown below is already selling like hotcakes, with the automaker increasing production to 100 vehicles per day. Depicted in the yellow inset box below is the honeycomb configuration of the i3’s CFRP-made frame, designed to increase strength while reducing the weight and volume of the materials used – allowing for more cabin room despite some loss of space to the battery.

Sources: MotorAuthority.com / Wikipedia

A variety of future models will also be built using carbon fiber materials at the Moses Lake plant, including the ultra-elegant Vision Future Luxury, shown below.

Source: MotorAuthority.com

The VFL model will make widespread use of CFRPs, from its shortened B-pillar to its doors and panels under the seats. Other parts expected to be made of carbon fiber include wheel rims, seat frames and dashboards.

“CFRP is a key material for the automotive industry of the 21st century,” described Dr. Klaus Draeger, board member for purchasing at BMW AG. “In our endeavor to identify increasingly lightweight materials in order to reduce a vehicle’s weight and thus its fuel consumption and carbon emissions, this material plays a crucial role.”

Will CFRPs Drive Investors’ Profits?

While a crackdown on the use of coal around the world has caused coal prices to fall in recent years, from $92 a ton in early 2011 to $58 a ton by mid-2013, prices have since last August been on the rise once again, currently hovering near $69 a ton. The increased use of carbon fiber materials by multiple industries from aerospace to automotive to wind power generation has undoubtedly impacted coal prices, and will likely continue to lift prices higher in the future.

But if coal futures don’t light your fire, you might be more comfortable with a coal producer fund, such as the Market Vectors Coal ETF (NYSE: KOL), whose top five holdings include the $47 billion large cap China Shenhua Energy Co Ltd (HK: 01088), the $9.8 billion mid cap Aurizon Holdings (ASX: QRNNF), the $6 billion mid cap Joy Global (NYSE: JOY), the $10 billion large cap CONSOL Energy (NYSE: CNX), and the $5 billion mid cap Peabody Energy Corporation (NYSE: BTU).

While the ETF has fallen with the coal price since 2011, it hasn’t quite followed the commodity back up as of late, bouncing around within the $17 to $20 range since mid-2013. We need to keep in mind that producer stocks often lag behind commodity prices due to production costs and other corporate expenses. Yet the fund does pay a decent annual yield, currently at 2.3%.

Perhaps the better way to participate in BMW’s deal with SGL is to pick up some shares of the automaker itself. Trading as BMW.DE on Frankfurt’s XETRA exchange, BMW stock has risen some 250% over the past five years, as compared to the S&P 500’s 105%. Trading at a modest 1.58 times book value and a slim 0.76 times future sales, its forward price to earnings ratio of 9.75 times makes it a far better value than most U.S. companies.

While BMW’s $200 million investment in SGL should boost the $2.4 billion mid cap’s profitability over time, the Washington State-based factory has been having some trouble lately, which is probably why it is still trading on the OTC (over-the-counter) market instead of on a regular stock exchange. While its $34.77 stock is trading at a modest 2.64 times book value and 1.18 times sales, its price to forward earnings is an appalling 151.17 times.

With a profit margin of -28.93% and an operating margin of -1.05%, its recent quarterly growth year-over-year is an atrocious -15.2%, with an EBITDA (earnings before interest, taxes, depreciation, and amortization) of 3.7% of its market cap.

By comparison, BMW’s EBITDA of 18.2% of its market cap, while General Motor’s (NYSE: GM) is 19.6% of its market cap, and Ford Motor Company’s (NYSE: F) is 17.9%.

At this stage in carbon fiber’s rise to fame as the manufacturing material of choice from autos to motorbikes to planes and so much more, it would seem that investing in the end user companies is the better way to go, since they will likely be the ones who benefit most from the cost reductions afforded by the carbon-fiber revolution.

Joseph Cafariello