Vancouver Sun

PLAYING BOTH SIDES OF THE ELECTRIC VEHICLE, AUTONOMOUS DRIVING TRADE

Adopting new technologi­es could create opportunit­ies for firms: portfolio manager

- JONATHAN RATNER

Electric vehicles, autonomous driving, and the future of the automobile have been getting a lot of attention these days, both in the media and the stock market. New vehicle-related technologi­es will undoubtedl­y have a profound impact on how we live our lives, and where resources and capital is allocated, but the question that remains is one of timing.

Tyler Hewlett, director and head of Canadian growth equities at BMO Global Asset Management, believes the adoption of electric vehicles (EV) and autonomous driving creates opportunit­ies for companies on both sides of the playing field: those that are directly involved in these industries, and those that are being unduly punished by the market.

Hewlett’s bottom-up stockselec­tion process as portfolio manager of BMO Canadian Small Cap Equity Fund, which he has worked on for more than 11 years, and manages with David Taylor, is entirely fundamenta­lly focused. They target companies with stable growth that can continue for many years.

“While we’re starting from a low base, both electric vehicles and autonomous driving certainly seems to be accelerati­ng,” Hewlett said. “We think it is a trend that’s not going to stop.”

He highlighte­d EV sales growth of more than 70 per cent in Canada over the past couple of years, but the market segment only accounting for less than one per cent of vehicles sold.

“By the time EVs really catch hold, it could be anywhere from a decade to many decades down the road before it begins to affect things like fuel sales and oil demand in any significan­t way,” Hewlett said.

At the same time, we could be a long way from the peak for internal combustion engine vehicles on the road, particular­ly because of the high costs associated with EV batteries.

Hewlett also pointed out that most EV sales so far have been at the very high end of the market. Until that shifts more toward the mid-market auto segment, the percentage of EVs relative to overall sales will remain pretty low.

“Subsidies obviously help, but from a long-term perspectiv­e, the economics have to stand up on their own,” Hewlett said.

In the metals space, much of the market is focused on the positive impact EVs will have on cobalt and lithium demand. But what investors may not realize, is that EVs actually require more copper than the other two metals.

“We think EVs should help copper demand, which is already quite strong given that the metal usually benefits from a strong global economy and supply is very limited,” Hewlett said.

The manager highlighte­d his position in Ero Copper Corp. (ERO/TSX), which went public in October 2017, and has production assets in Brazil.

Ero’s management team has a track record of success with the Lumina group of companies, and insiders own almost 25 per cent of the outstandin­g shares.

“We like to see management alignment with shareholde­rs, and new management has a plan to increase production and mine life without investing extra money on infrastruc­ture,” Hewlett said. “That is very important from a return on capital perspectiv­e.

He believes the company can get much bigger over time, and so can its mining operation in Brazil.

One fund holding that some investors worry could be negatively impact by shifts in auto technology is Parkland Fuel Corp. (PKI/TSX), which operates more than 1,800 gas stations in Canada.

Despite recently making some large transforma­tional acquisitio­ns in the retail fuel business, the stock has been under pressure for much of the past year, mainly on concerns about what EVs could mean for the future of fuel sales. But

Hewlett thinks it will take at least 10 years, and probably much longer, before fuel demand starts to decline, and the market could be much larger by that point.

“We think the market is looking out too far and ignoring what this company can do in the meantime,” the portfolio manager said. “This is a really strong management team with a history of creating value for shareholde­rs,” he added, noting that cash flow per share should grow by more than 20 per cent over the next two years.

Hewlett also pointed out that Parkland is trading at its lowest multiple in many years, will generate synergies from its acquisitio­ns, and should be able to capitalize on further pressures in the industry through asset purchases.

Autonomous driving has seen a lot of progress in recent years, although government regulation has kept most of these vehicles off public roads. Nonetheles­s, many related features have made their way into mainstream vehicles, including collision avoidance and lane departure warnings.

“Cars are certainly safer than they were 20 years ago, but we have many more things to distract us now, which is one reason why the overall number of accidents may have not gone down,” Hewlett said.

Fewer accidents is certainly the goal, but safety sensors that help avoid collisions are very expensive to replace. So even if accidents do decline, repair shop owners such as Boyd Group Income Fund (BYD.UN/ TSX), could see the negative impact offset by higher average vehicle repair costs. The company has about 500 locations, more than 80 per cent of which are in the U.S.

“Boyd has been able to consolidat­e a market that has not always been very profession­ally run,” Hewlett said.

“Management team has track record of success,” he added, noting that cash flow has grown by more than 35 per cent annually for more than five years, and with insurance companies becoming the biggest payers in the market, that bodes well for Boyd.

 ?? PETER J. THOMPSON ?? Portfolio manager Tyler Hewlett believes that auto technologi­es have the potential to benefit other industries, such as boosting demand for copper used in electric vehicles.
PETER J. THOMPSON Portfolio manager Tyler Hewlett believes that auto technologi­es have the potential to benefit other industries, such as boosting demand for copper used in electric vehicles.

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