Electric and autonomous vehicles capture the imagination and the headlines. Like many earlier technologies, such as the internal combustion engine and commercial aircraft, electric vehicles promise to change the course of human history. But it is easy to mistake excitement about the technology for a free ride to investing success.

History lessons

History shows that new technology, even technology that has changed the world, has not necessarily made for good returns.

In auto manufacturing, the wave of change will disrupt everything from petrol stations and fuel tankers to coal mines and mechanical car maintenance. On the supply side, as component makers scale manufacturing and the production costs fall, cheaper products will open new markets and demand.

It may come as a surprise, but the first electric car was released in 1837. That puts electric vehicles ahead of Ford’s Model T by about 70 years. Then, as road infrastructure improved and people saw the value in driving longer distances, early electric vehicles were unable to meet the challenges of range and speed. Then, oil prices plunged and electric vehicles were relegated to the scrap heap.

More recently, rising oil prices and environmental campaigns, as well as advances in battery technology, has meant the return of electric vehicles today is likely to be longer-lived.

Costs coming down

On the demand side, the total cost of electric vehicle car ownership is expected to reach parity with combustion engines this year, making the decision to buy electric that much easier.

Even though electric vehicles will initially carry higher sticker prices, when fuel and maintenance savings are factored in, electric vehicles will become cheaper – especially in regions where fuel costs are higher, such as Europe. Once that happens, an inflection point for demand will be reached.

For investors, it is important to remember that many businesses will be disrupted by the changes. Many production line jobs will be lost.

Not only will the car industry need fewer people to manufacture vehicles, fewer still will be needed to maintain them. Petrol-fuelled, internal combustion engines are much more likely to fail than an electric vehicle’s motor, and that’s not surprising considering internal combustion engines have significantly more moving parts.

Now it won’t all be bad news for investors in the internal combustion engine and ancillary industries. According to BP, by 2040 there will be nearly two billion cars on the planet, but only 300 million or 15% of these will be electric cars. In other words, 85% of the global vehicle fleet is expected to have an internal combustion engine.

With that in mind, let’s look at a few companies with exposure to the changing world of the most popular form of personal transport in the developed world.

ARB Corp (ASX:ARB)

ARB is Australia largest manufacturer and distributor of aftermarket 4WD accessories with an international distribution network that extends to more than 100 countries globally. Despite growing its equity three-fold over the last decade, management has managed to maintain a return on equity of almost 20% per annum, ensuring value creation, which in turn has been reflected in a share price that has risen from $3.85, 10 years ago, to around $20 today. Today, however, the share price appears expensive.

ARB is unlikely to be affected by electric vehicles given charging stations are unlikely to be available where most of the company’s customers drive their vehicles. In the meantime, the company continues to display solid operating trends with third quarter revenue growth of over 12%, driven by Australian aftermarket revenue growth of over 11% and export market revenue up more than 16%. By the end of 2019, another seven stores are expected to be opened, and the current sales order book is reported to be very strong, thanks to car manufacturers releasing a plethora of new models.

BAPCOR (ASX:BAP)

BAP distributes automotive aftermarket parts and accessories, such as air filters, brake pads, oils and lubricants as well as fan belts and engine parts directly to independent mechanics and through its own networks, including under the Autobarn and Bursons brands.

Bapcor is likely to eventually be affected by the reduced need for repairs and maintenance by more efficient battery-powered induction engines but it will be many decades before the mix shifts and the Australian and New Zealand car fleet is sufficiently dominated by electric vehicles to affect parts suppliers.

Nevertheless, the share price for BAP is over 19 times forecast 2019 earnings and recent acquisitions, such as NZ’s Hellaby, which are performing strongly, have increased the debt on the company’s balance sheet. While the debt has only taken the company’s net debt to equity ratio to 56%, it does come at a time when interest rates are rising and the economy may slow down. This is a pro-cyclical business, trading at an expensive price.

Super Retail Group (ASX:SUL)

Included in the company’s suite of consumer retail networks and brands is BCF (Boating Camping and Fishing), Rays Outdoor, Macpac, Rebel Sport and Supercheap Auto, the latter selling car accessories and car care products as well as tools and spare parts.

Arguably more consumer focused than Bapcor, Super Retail Group’s fortunes are even more affected by consumer sentiment. The arrival of Amazon to Australia’s shores will also have an impact, especially on the company’s non-automotive businesses, such as Rebel Sport.Cash from operations materially exceeds reported profits, but even though the company has added value since 2013 by improving profits and profitability, the share price remains stubbornly below its 2013 highs.

Bank credit tightening, rising interest rates and falling house prices are all conditions weighing on pro-cyclical discretionary consumer stocks and while the share price currently appears to represent reasonable value, it is likely that any deterioration in economic conditions will be accompanied by downgrades to SUL’s earnings outlook forecasts.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.