The energy and industrials sector is hugely varied in the kinds and sizes of companies it contains, and it's bursting with investment opportunities, if you know where to look.
In this week's Energy episode of Industry Focus, three Motley Fool energy writers share one of their favorite stocks in the sector and explain why they're so exciting for the long term. Listen in to find out why auto giant General Motors (NYSE: GM), infrastructure company NV5 (NASDAQ: NVEE), and offshore drilling company Transocean (NYSE: RIG) are three companies you might want to have on your radar, the most important risks and concerns you need to know about them before investing, and more.
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A full transcript follows the video.
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This video was recorded on Oct. 19, 2017.
Sarah Priestley: Welcome to Industry Focus, the show that dives into a different sector of the stock market every day. It's Thursday, Oct. 19, and it's the Energy and Industrials show, and we're nearing the end of our "Pitch a Stock" theme week across Industry Focus. I'm your host, Sarah Priestley, and I'm joined in the studio by the one and only Kristine Harjes, from Wednesday's much-loved Healthcare show. Kristine, thank you for joining me today!
Kristine Harjes: Thanks so much for having me on the show! I don't think we've ever had an episode together.
Priestley: I mean, we had a group episode together.
Harjes: Other than the all-hands, it's never been just you and me in here.
Priestley: No. We're testing it out today. [laughs] To give listeners some background, if you haven't caught any of the other Industry Focus shows this week, we're doing "Pitch a Stock" theme week. Fool.com has around 100 freelance and contract writers and editors, and each year, we invite them to Fool headquarters for our annual writers' conference. We thought this time, we would ask three writers from each sector to pitch us a stock of their choosing. Today, on the Energy and Industrials show, we'll be hearing from our esteemed colleagues on General Motors, ticker symbol GM; NV5, ticker symbol NVEE; and Transocean, ticker symbol RIG. After the pitch, Kristine and I will share some of our thoughts on those companies. First, we're going to be hearing from John Rosevear on GM.
John Rosevear: I'm John Rosevear. I'm the senior auto specialist for fool.com, and the stock I want to talk about today is General Motors. A lot of you probably just went, "Oh, no," because GM has such an awful history. Bear with me. Yes, it's true that the U.S. new-car market is probably on the downward side of its cycle. And yes, it's true that the auto industry is in the early stages of being shaken up by huge, high-tech changes that we hear about all the time.
But here's the thing about GM right now. Right here, in 2017, CEO Mary Barra has it in great shape. It's very profitable right now thanks to huge demand for trucks and its new crossover SUVs. It's also very well positioned not just to survive but to thrive and profit as things like shared electric, self-driving cars become mainstream over the next several years. In fact, I think we can think of GM as both a value-priced dividend stock right now, and something of a growth stock if we look ahead several years at the same time.
Listeners probably know that GM is already out in front of the industry with its affordable, long-range electric car, the Chevy Volt. The Volt even beat Tesla's (NASDAQ: TSLA) Model 3 to market. Of course, the Volt isn't selling in Tesla's numbers of thousands and thousands. But the point is, GM has roughly caught up with the technology, and it has at least 20 more all-electric vehicles in development. The next two are due by the end of next year. So GM is right in front here, and GM has confirmed that it's aiming to be 100% electric eventually. It said its future is electric.
GM is also out in front of most of its rivals with self-driving technology. GM executives said last month that it now has a mass-producible self-driving car ready. It's a Chevy Bolt that has been extensively modified by Cruise Automation, which is the self-driving start-up that GM bought early last year. At this point, the only thing holding GM back from banging out self-driving cars by the thousands is probably costs. The LIDAR sensors, the laser sensors they use to do precision mapping on the roll, they're still expensive. But guess what? Last week, GM bought a start-up that has developed a new low-cost LIDAR unit. They have all the pieces in place now.
GM may not be the absolute leader in these new technologies, but it's close enough to the front of the pack that it's very likely to be among those that get really fat, substantial profits bigger than you've seen in the traditional auto industry in terms of margin as these self-driving vehicles and electric cars become mainstream things. Mary Barra has said repeatedly that she thinks investors should see GM as a significant profit growth story in progress in large part because of that technology, and I think she's right.
There's also the value part of this. GM has had a nice run of the last six months or so. It's up about 30%. To me, that's a sign that Wall Street is starting to catch on to this story, but you haven't missed the boat. Right now, it's still quite cheap at less than 8 times expected 2017 earnings. GM pays a fairly conservative dividend that's aimed so that it can sustain the dividend payments through a recession. Because the stock is still cheap, the dividend yield is 3.5%, which is pretty nice.
It's true that sooner or later, we'll have a downturn, a recession, and GM's profits could take a hit for a while. But I think GM will be especially well positioned to take off on the other side of that downturn, and I think if you reinvest that dividend between now and then, you might really like the results. I own GM stock, and that's my plan. Thanks for listening.
Priestley: Kristine, what do you make of John's GM pitch?
Harjes: It's no secret that the car industry is going through a massive transformation. Gas and diesel cars are going to be replaced worldwide by electric. In the coming decades, car ownership will decline as more and more people favor car sharing. Self-driving technology is on the cusp of becoming mainstream. It's been a fascinating transformation to watch, and it's by and large the new, smaller, on-the-cusp-of-technology companies that are really getting all of the mainstream media attention. And so, what I love about this pitch is that it took a well-established household name, one that many might see as somewhat antiquated or on its way out, and it highlights the advancements that this company is making that put it at the forefront of this auto revolution.
Priestley: Yeah, absolutely. I love the fact that John said GM is a value-price dividend stock currently, and a growth stock if we look ahead in the next several years. He said GM may not be the leader in technology, but it's likely to get fat profits, and I like that because I think this is such an underappreciated aspect of a lot of stocks today. As you said, the Teslas of the world get so much press time.
And in fact, honestly, some of the companies that are likely to make the most out of these new industries are probably the companies like GM, who are best placed with the infrastructure, the legacy knowledge and everything else to actually mass-manufacture a lot of these products, and you can see that with the Chevy Bolt. They beat the Model 3 to market. They now have an extremely well-run production line for making electric vehicles, actually much better than Tesla, as demonstrated by last month's Model 3 miss. The other thing to remember, too, is that once they can crack the profitability of these cars, they'll be away. Because right now, it's not profitable at all, I think they lose about $9,000 per car.
Harjes: But it does seem like the way they're approaching it is, where they can't figure it out themselves how to do this efficiently and cheaply, they're able to use their size and their cash flow to finance some acquisitions to acquire some of these smaller, smarter players that have figured out the technology.
Priestley: Yeah, absolutely. They bought Cruise Automation. Cruise Automation, working with them, they've delivered a fully autonomous, or believed to be fully autonomous, Bolt. OnStar is also data-gathering and connecting vehicles, so they're the first to deploy between-car communication that's on the road right now. So, absolutely, a ton of things that are gearing up to make them successful in the future, and this is 100% necessary, because you have countries like France, Great Britain, Norway, and possibly soon to be China and India saying that eventually, they're going to ban the sale of gas and diesel cars. So that's going to revolutionize the industry.
Harjes: China in particular would be absolutely huge there. That's the world's largest car market, and they are planning on banning the sale of gas and diesel in the coming decades. It seems like GM is poised to take advantage of that. They sold more cars in China than the U.S. last year, which is pretty incredible, and they have plans to launch 10 electric or hybrids there by 2020.
Priestley: Absolutely. The new plan, the 100% electric, which is where they're heading, which was announced fairly recently -- they're planning two more electric vehicles into the U.S. the market next year, a further 18 eventually by 2024, I believe. So there's so much to watch here. And as you said, they're really focusing on these acquisitions to bring down the costs, especially with the LIDAR technology that John mentioned. They recently announced an acquisition in that field. So, 100% extremely behind what John said. They definitely shouldn't be underrated. And its 30% stock price rise this year indicates that Wall Street is starting to take notice, too.
Harjes: And yet they're still trading fairly cheaply. Historically, automakers trade around 10 times their earnings, and GM is only around 7.7.
Priestley: Yeah, absolutely. Possibly a very good way to get into some of these nascent technologies. Is there anything else you'd like to add?
Harjes: I think that about covers it.
Priestley: Next up, we have Jason Hall pitching NV5 Global, ticker NVEE.
Jason Hall: I'm Jason Hall. I've been a writer for The Motley Fool for about five years. I cover energy, different industrials, that sort of thing. I've found myself really interested over the past few years looking at some of the more secular growth plays.
A company that I found and I think is really interesting right now is NV5 Global. It's a small engineering infrastructure consulting company. It's an interesting opportunity for a couple of reasons. No. 1, if you think about, from a national basis, in the U.S., we need to spend something like $800 billion a year on infrastructure, modernization, and competitive investment to be competitive with the rest of the world over the next 25 years. On a global basis, this is a $3 trillion annual industry. Most of that money goes into the steel and concrete and that sort of stuff. But the companies that design the projects and manage the implementation and provide consulting services are really important.
NV5 Global is going to do about $350 million in sales this year, so it's really small. The founder of the company, Dickerson Wright, has a really great track record in this industry of building businesses through acquisition and organic growth. He's a major shareholder, he holds 10% of the company, so he's really invested. So you have a founder-led business with a really great track record.
And it's a relatively expensive stock. It trades 40 times trailing earnings. It's cheaper, you look at it on a forward basis, trading for around 30 times there, management's projections for 2017's earnings. But you're looking at $350 million in sales, and a multibillion-dollar global industry, multitrillion dollar global business, it's a really great opportunity, I think, to invest in this company right now.
Priestley: So Kristine, what did you make of Jason's pitch?
Harjes: Unlike GM, I had never heard of this company.
Priestley: Me either.
Harjes: And honestly, prior to researching for this episode, I knew very little about infrastructure at all. In case our listeners are starting from scratch like I was, infrastructure is this category that's all about the physical and the organizational structure that's needed for the operation of a society. Things like buildings, roads, sewage, water, energy and power, communication, all that sort of things.
NV5 primarily focuses on five business verticals. They had construction quality assurance, infrastructure engineering, support services, energy program management, and environmental solutions. There are more than 100,000 engineering and infrastructure consulting firms in the U.S., so NV5 is not even close to being alone in what it does, but they seem to stand out from their competitors for three reasons. They have a proven management track record, they have a very smart, acquisitive strategy, and they have a large insider ownership stake.
Priestley: Yeah, absolutely. The insider-ownership stake is something that we look for in a look for in a lot of companies, that the employees have skin in the game. They're the 60th largest engineering firm in the U.S., ranked by Engineering News. So yes, this is a hugely fragmented industry. But the opportunity, which is really what Jason is focusing on in his pitch, is undoubtedly huge. I think last year, 2016, global spending on infrastructure was $3.1 trillion. That's massive. And as he rightly said, a lot of the spending of that is going on to the physical aspects. The concrete you need, the steel you need, everything else. But a proportion is also going to the engineers and consulting. So a small slice of that pie, even, is massive.
Harjes: Yeah, absolutely. This is a growth stock for sure. It's up something like 7x since its 2013 IPO. It was recently ranked as 13th on Fortune magazine's 100 fastest-growing companies list in 2017. The opportunity in front of them is absolutely incredible. I mentioned earlier their acquisitive history. They were able to grow its geographical and also its technological reach by snapping up some of these other competing companies. They've acquired more than 20 different companies since their founding, and if they continue to pursue that strategy, they should be able to really take a hold of this global market with a very strong macro-trend behind it.
Priestley: Absolutely. The macro-trend is really your main thesis, I would think, to buy this company. Infrastructure engineering isn't driven by economic cycles, so no matter what the economy is doing, we still need water to drink, we still need our waste treated, unfortunately, and we still need bridges to get over places.
Harjes: In particular, I'll add that it's a trend that's very much supported by demographics. You are probably going to see the global middle class roughly double over the next 30 years, according to various estimates, and the majority of these people are going to live in cities, where, in particular, you need this sort of investment.
Priestley: Absolutely. One thing I would like to know more about with the company is, they have 100 different global locations, but how much are they centered in China? Because China is going to be huge. They spent the most on infrastructure last year, two and a half times the next person on the list, which was Western Europe. So I think it was important to have a look at how much they're operating there.
And then, also, to just be aware that this is a hugely expensive stock at the moment. Its price-to-earnings is 41. Obviously, there's a lot of competitors. One of the biggest ones is probably Chicago Bridge & Iron, that's a public company that people could reference against. They're in for some trouble at the moment, so maybe this is another play you can look at if you're interested in that industry. Anything else you would like to add?
Harjes: I'll again reiterate that this is absolutely a growth stock. It's very expensive, but it's fairly small right now. The market cap is somewhere in the $580 million range, which is pretty tiny, particularly when you think about the numbers that are in the high hundred trillions associated with his global market.
Priestley: Absolutely. Last but certainly not least, we have Tyler Crowe pitching Transocean, ticker symbol RIG.
Tyler Crowe: My name's Tyler Crowe, I'm an oil and gas analyst for fool.com, and we're going to talk about a stock I want to talk about today, and that's Transocean, ticker symbol RIG. Transocean is an oil and gas rig provider. Basically, they're an offshore rig company that's looking when an explorer -- say, somebody like ExxonMobil wants to go drill out on the offshore, they don't own the rigs they use. Rather, they contract a company like Transocean or some of its peers.
When you're looking at a company like this, you have to kind of think about the oil and gas market over the past couple of years. Since 2014, we've seen a very large drop in the price of oil, and as a result of that, a lot of people have been looking at the industry and saying, I don't think it's really worth it to be investing in here, especially in offshore, where the costs for production are much higher than places, say, in the Middle East, or shale, which, the price has gone down significantly over the past couple of years.
Now, that makes pretty good sense. The only thing that doesn't really consider is that shale and some of the other lower cost, like OPEC, those are a little less than half of the market. If you look at the rest of the market, there's been a massive wave of underinvestment over the past couple of years, which basically means that, as current oil production depletes, you're going to have to replace that. And we haven't really found an effective way to do that as of yet with something like shale that can absorb a little bit of the market, but not all of it.
And that's where an investment thesis in Transocean and a lot of these offshore players lies. In the next couple of years, shale is not going to be able to take up all of that, and then you get this situation where prices are going to rise, and it's going to make it much more attractive to invest in the offshore area.
Now, the reason that I'm picking Transocean in comparison to a lot of its peers is both because of its financial position and also because of the fleet of rigs it has. Over the past couple of years, CEO Jeremy Thigpen has basically gone over a massive fleet turnover. Transocean used to be one of the companies with the oldest fleets in the market. Today, over the past couple of years, Thigpen has basically turned over the fleet such that it has one of the newer fleets in the market, without really breaking the bank financially, unlike some of its other players who have gone bankrupt as a result. At the same time, when companies are going to be investing, they're going to be looking for those new rigs, especially ones with high specifications that can go into the deepest, most challenging areas. Transocean has a very large and available fleet to do that over next couple of years.
Now, on top of all of that, you also have to look at investing in the stock. And that's where, for me, Transocean looks the most compelling, because today, Transocean trades at a price-to-tangible book value of 0.3 times, which basically means that you're getting the stock at $0.30 on the dollar for the asset values of the company. As the value or the need for offshore rigs increases, and those things get deployed, it's very hard to see a situation where Transocean is going to be priced at such a low premium or discount for so long. And historically, it's a company that's traded 2 to 3 times tangible book value. So if you're looking at a situation over the next couple of years where the offshore fleet gets deployed like some people are going to expect between now and 2022, I think, over the next five years, something like Transocean could be a very interesting stock for people to look at.
Priestley: Kristine, what do you make of Tyler's RIG recommendation?
Harjes: Much like the last pitch that we heard, there are two things to consider here -- should you invest in the sub-industry, and should you invest in the stock? The sub-industry, are offshore rig companies a good investment right now? If so, is Transocean the cream of the crop? Oil prices have been rising over the past few months, and Transocean's stock has been following it pretty much in step, as it's prone to do. Industry expectations are that offshore drilling is about to kick back into gear, and I really like that Transocean has positioned itself to be ready to profit as soon as the recovery really starts up. It seems to me that this is necessarily a long-term play, and it's really not for the faint of heart. Oil is still regaining its stability, and I have to imagine that the entire subsector of offshore drillers will continue to be volatile as it does so.
Priestley: Yeah, absolutely. I think that's the key thing for people to remember. My personal opinion is that offshore drilling may not recover this decade. We may have to wait until the 2020s to see that.
There has been historically an oversupply of offshore rig. Transocean has, in the last 10 years, had to deal with the Deepwater Horizon event, the collapse of crude prices, and it's definitely taken its toll on the company. However, I do agree definitely with Tyler that it's one of the best-placed companies. It's really paid down a lot of its debt, it's rationalized its rig count, and as you said, it's poised to take advantage when things turn around. It's just a matter of when that actually happens.
The important thing for people to remember is, a lot of rig contracts were agreed on oil prices were high, so they're still relying on a lot of those rig contracts. Some of those are coming to expire soon, and the backlog of orders is something for people to be aware of and slightly concerned with. They expanded their backlog a few months ago, when they bought Songa Offshore for $4 billion, and that acquisition gives them opportunities in the strength in North Sea oil area that we're starting to see come back online after it was pretty much left for dead.
Harjes: Yeah, absolutely. That seems like it was a very smart move, because new contracts have been really hard to come by since 2014 or so. Ultimately, when I think about this pitch and whether or not I would want to invest in Transocean, I think Transocean seems like it's probably the best company from its competitors. It seems like it's really handled the situation well. Many of its competing companies have had to file for bankruptcy, whereas Transocean has been able to prune its assets and make some smart acquisitions. But the question for me is, would I want to invest in this macro-industry? And on that one, I'm not so sure.
Priestley: Yeah, I would agree with you to be hesitant. I do think, if you look at shale and OPEC, it's much cheaper to produce oil on land and from shale. But that's only half of the global supply. At some point, we're going to reach a point where the demand is outstripping shale and OPEC alone, and offshore really has to come back online in the way we'd seen it before.
I think one thing that's going to change is the rig day rates. So companies like ExxonMobil will pay per day for the operation of the rig. These day rates used to be as much as $500,000 a day. I think those days are pretty much over. One reason is, a lot of the rigs have been updated; they're much more efficient now. And the other is just a highly competitive, downtrodden market.
This week, Transocean announced a two-year contract for its Deepwater Invictus rig with BHP Billiton. This is the first sign of optimism from the market, because oil prices are rebounding. But the rumored terms of this agreement was for a $145,000-per-day rate, which is obviously a completely different environment. I still imagine that they're breaking even at those terms, but it may be harder for them to eke out some of these massive profits that we've seen before.
Anything else you would like to add? I think your bottom line was exactly right -- demand for rigs is going to be driven by the overall commodity prices. If you're bullish on the commodity, then you might be bullish on this subsector of the industry.
Harjes: Yeah. I think that nicely ties a bow on the Transocean pitch. One thing I do want to add on a higher level is, this is a really interesting sector. I was very impressed by how diverse these three pitches were. You had a small-size company, a midsize company, a large company -- they do three completely different things.
It's been a lot of fun. Sarah. Thanks so much for having me on.
Priestley: No, thank you very much. I'm glad you say that, because I feel 100% the same. I love manufacturing, infrastructure, and oil and gas. I think there's just so much opportunity for investors there. So thank you very much for saying that. It's been a pleasure having you on the show today.
I hope listeners have taken something from this. Please feel free to get in touch with us if you would like to hear anything more on what we've been discussing today. Email us at email@example.com, or tweet us on Twitter, @MFIndustryFocus. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. For Kristine, I'm Sarah Priestley. Thanks for listening, and Fool on!
Jason Hall owns shares of General Motors, NV5 Global, Tesla, and Transocean and has the following options: long January 2019 $15 calls on Transocean. John Rosevear owns shares of General Motors. Kristine Harjes has no position in any of the stocks mentioned. Sarah Priestley has no position in any of the stocks mentioned. Tyler Crowe owns shares of BHP Billiton, ExxonMobil, and Tesla. The Motley Fool owns shares of and recommends Tesla. The Motley Fool owns shares of ExxonMobil. The Motley Fool has a disclosure policy.