It happened again.
Six months after the "check engine" icon suddenly appeared on my car's dashboard -- and just as suddenly disappeared -- it's back. And with my old jalopy pushing 10 years old already, and not worth investing a lot of money in for repairs, it looks like yours Fool-y is going to be in the market for a new car pretty soon.
And this being 2023, I'll admit: I've been looking for an excuse to explore buying an electric car. But there's been one thing in particular that's kept me from pulling the trigger: I have no idea how much it's going to cost.
Or at least, I had no idea how much it was going to cost until Monday, April 17.
How much does it cost to buy an electric car?
As a general rule, electric cars in the United States cost about $16,000 more than equivalent gas-burning automobiles. That much is pretty clear. However, in an effort to encourage more car buyers to go electric despite the higher MSRP, the U.S. government has for several years now offered income tax credits for some buyers of some electric cars, slimming down the EV price-premium. The problem is, the specifics of who gets the credits, and on which EVs, are constantly changing.
The latest change arrived on April 17, when the U.S. Internal Revenue Service and the Department of Energy confirmed that buyers of new electric vehicles placed in service on April 18 or later may receive income tax credits of either $3,750 or $7,500, subject to the following conditions:
- The car buyer's income must be no more than $150,000 ($300,000 for married couples filing jointly).
- The EV must cost no more than $55,000 (for cars and crossovers) or $80,000 (for trucks, SUVs, and minivans).
- The EV must be built in North America (i.e. the U.S., Canada, or Mexico).
- If at least 50% of the EV's battery components are manufactured in North America, a credit of $3,750 may be applied.
- If at least 40% of the EV's "critical minerals" making up that battery are sourced either from the United States or from a state with which the U.S. has a free-trade agreement, a credit of $3,750 may be applied.
- And if both those last two criteria are met, the credit can therefore total $7,500 -- enough to cut the EV price-premium over the cost of an ordinary car roughly in half.
What it means to you as a car buyer
Now, unless you work in the automotive industry yourself, you may not be 100% clear on precisely where electric batteries are made, or which cars they're going into. And unless you happen to work for the U.S. Department of State, you may not be quite up to date on which countries the U.S. has free trade agreements with either.
Luckily, on April 17 the Department of Energy took some of the guesswork out of this process by publishing a list of exactly which EVs currently qualify for the IRS credits. So if you are in the market for a new EV right now -- as I am -- the upshot of all the above rules is now pretty simple:
Buy American brands.
This is because exactly zero non-U.S. car brands currently qualify for any of the IRS tax credits. Prior to April 16, certain EV models from Hyundai, Kia, Mercedes, Nissan, and Volkswagen, and others might have won IRS tax credits -- but no longer. Henceforth, there are really only four car brands that have a chance at cutting your cost of buying a new EV by contributing IRS tax credits: Ford(NYSE: F), General Motors(NYSE: GM), Stellantis(NYSE: STLA), and Tesla(NASDAQ: TSLA).
What it means to you as an investor
Knowing this is just as important for car stock investors as it is for car buyers. Because, all else being equal, it simply makes sense that car buyers will gravitate toward buying cars that the government is paying part of the purchase cost of. Conversely, companies that try to compete with the discounts awarded by the IRS by lowering the cost of their EVs to match the final cost paid by buyers of Ford's F-150 Lightning (for example) -- or Chevy's Bolt, Stellantis's Jeep Wrangler Plug-In Hybrid, or Tesla's Model 3 or Model Y -- will necessarily be accepting lower profit margins than what they'd expect to earn by charging full price for their wares.
Or put more simply: The U.S. government just decided that U.S. car companies are going to be more profitable than non-U.S. car companies. By law.
What's more, it's not as if these companies were hurting for profits even before the IRS began throwing money at them. Despite dramatically cutting prices on its cars lately, Tesla retains one of the highest operating profit margins in the car business -- 14.8% over the past 12 months, according to data from S&P Global Market Intelligence. Stellantis isn't far behind with an 11.7% operating margin. GM and Ford -- while not operating quite at Tesla's level -- still manage operating margins of 7.7% and 4.8%, respectively.
Admittedly, both GM and Ford lag Volkswagen, at 8.3% margins. But thanks to the U.S. government, perhaps not for much longer. Already, Ford for example has announced plans to convert one-third of its production to EVs by 2026. By 2035, General Motors expects to be 100% electric -- and the more EVs these companies produce, the more subsidies they will reap, boosting overall profit margins for the companies.
Which of the U.S. government's favored four car stocks will make for the best investment? With Tesla, Stellantis, GM, and Ford operating on basically a level playing field now, tax-credits-wise, the answer will depend largely on which automaker makes the more popular EVs. But all else being equal, I have to say that General Motors and Stellantis stocks look especially cheap at just 6 and 3 times forward earnings, respectively. (Stellantis also pays a very attractive 7.9% dividend yield to sweeten the deal.)
Speaking of dividends, Ford stock may be a bit pricier than its rivals at 7.4 times forward earnings, but its 4.9% dividend helps make up the difference.
Tesla, however, at nearly 52 times earnings and with no dividend whatsoever, would be last on my shopping list.
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Rich Smith has positions in Stellantis. The Motley Fool has positions in and recommends Tesla. The Motley Fool recommends General Motors and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.