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3 Long-Term EV Plays to Reap Benefits From the Climate Bill

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U.S. President Biden has signed the sweeping climate change bill into law. The bill — also called the Inflation Reduction Act (IRA) — is the boldest climate legislation in U.S. history. The landmark bill seeks to allot around $370 billion toward clean energy initiatives to turbocharge decarbonization efforts, which would put the United States on track to reduce greenhouse gas emissions by nearly 40% below 2005 levels by the decade-end.

The electric vehicle (EV) space is likely to emerge as one of the beneficiaries of the new climate bill.  As it is, amid heightening climate concerns and technological advancement, more and more cars are getting electrified as legacy automakers are fast shifting gears to e-mobility. And now this IRA is set to further supercharge the prospects of the EV industry.

To capitalize on the e-mobility future, consider adding to your watchlist the EV king Tesla (TSLA - Free Report) as well as two auto giants that are rapidly revving up their electrification game— General Motors (GM - Free Report) and Ford (F - Free Report) . Before discussing these stocks, let’s take a look at the key takeaways of the climate bill for the automakers.

IRA to Unlock EV Discounts Albeit With Caveats

The bill seeks to transform the U.S. auto industry with incentives that would induce automakers to accelerate the production of zero-emission vehicles in an effort to meet environmental goals. 

To encourage the adoption of EVs, the IRA includes a $7,500 tax credit till 2032 on the purchase of a new EV. Importantly, the tax credit will be sans the 200,000-car cap. In the current scenario, the tax credit phases out once a company has reached the 200,000 EV sales mark. A few auto biggies, including Tesla, General Motors and Toyota, have already exhausted the limit. The updated EV tax credit would remove that cap at the start of 2023.Beginning next year, the vehicles of these auto giants will again become eligible for a tax credit as long as they are manufactured in North America and meet the raw material sourcing requirements.

This brings us to one of the major concerns that automakers are set to face. The new bill has provisions for tax credits only for vehicles that are assembled in North America. In other words, the law immediately disqualifies any EV produced outside North America to take advantage of the incentives. Going by that, around 70% of the 72 models currently eligible for the $7,500 tax credits will no longer get the benefits, per the Alliance for Automotive Innovation. Notably, some of the mass market brands, including the Hyundai Ioniq 5, Kia EV6 and Toyota Rav4 Prime are no more eligible for the tax credit as they are not domestically manufactured.

And things would get tougher with the raw material sourcing criterion that comes into effect in 2023. Notably, the raw materials for the vehicle batteries should be procured only from countries with which the United States has free-trade agreements, starting from 2023. While the bill surely seeks to promote domestic battery manufacturing, many EVs will get disqualified for the credit benefit right off the bat.

There’s also a new $4,000 credit on used EVs, which are priced at $25,000 or less. But to be eligible for the tax credit for a used vehicle, the gross annual income of a family should not exceed $150,000 (for joint tax filers) or $75,000 (for individual tax filers).

For the new vehicles to qualify for tax credits, the sticker price for sedans should be below $55,000. Meanwhile, SUVs, trucks and vans, should not be costing more than $80,000.To qualify for the new EV credit, buyers’ taxable income will be capped at $150,000 if they are single filers or $300,000 for joint filers.

While on the surface, the IRA looks like a sure-fire legislation to fast-track the EV industry, things are not that hunky dory. With the new legislation, it may get difficult for many cars to qualify for the credit right, considering the sticker price and income caps. And most importantly the fact that the law requires the cars and batteries to be “made in America” remains a major limitation.

So, the new legislation may not be much beneficial for automakers, which don’t manufacture a large number of EVs in the United States or certain EV upstarts whose vehicles are too expensive to qualify for credit. Meanwhile, companies like Tesla, General Motors and Ford stand to benefit from the new climate bill as they have reorganized their supply chains to manufacture vehicles in America. 

3 Stocks in Focus

Tesla: With the sales threshold removal under the new bill, Tesla will regain eligibility for incentives beginning 2023 for its entry-level, Model 3 RWD variant, which is priced under $55,000. With both variants of Model Y classified as SUVs and meeting the price caps, they would also qualify for tax credits. Industry watchdogs believe that Tesla is the closest in terms of fulfilling the raw material sourcing requirements from the United States or trading allies, as mandated by the new law.

This EV behemoth currently carries a Zacks Rank #2 (Buy). The robust demand for Models 3 and Y is buoying Tesla's revenues. High volumes are also aiding Tesla in achieving production efficiencies, thereby strengthening gross margins. The company’s long-term expected EPS growth rate is 31.2%.

General Motors: While GM has also exhausted its quota of 200,000 electric cars, it will again qualify from next year now with the new climate bill. The company has numerous affordable EV brands that will be eligible for the $7,500 tax credit. These include Cadillac Lyriq, Chevy Bolt EV, Chevy Bolt EUV, Chevy Silverado EV, Chevy Blazer EV, Chevy Equinox EV and GMC Sierra EV. Silverado and Sierra EVs will only be eligible for lower trim levels considering the price cap.

General Motors, currently carrying a Zacks Rank #3 (Hold), intends to roll out 30 EV models by 2025-end. GM’s Factory ZERO and plants in Spring Hill and CAMI are setting the stage for the company’s electrification goals. GM’s Ultium Drive system is scaling up its e-mobility prowess. The company’s long-term expected EPS growth rate is 10%.

Ford: In May, Ford’s CEO Farley notified that he expected the Ford EV tax credits to dry up by late 2022 or early 2023. But with the elimination of the quota of 200,000 cars, Ford’s popular EV models stand to take advantage of the discounts under the bill. Both Mustang Mach E and F-150 Lightning are eligible for the tax credit, considering their manufacturing status and sticker price. All trim levels of Mustang Mach E— manufactured in Mexico with prices well below the $80,000 threshold for SUVs —qualify. Built in Michigan, all Standard Range models of the F-Lightning e truck that will fall below the $80,000 threshold qualify for the tax credit.

Ford currently carries a Zacks Rank #3. The firm’s aggressive EV push, with planned spending of around $50 billion by 2026 and the target production of over 2 million EVs by 2026-end (representing 70% CAGR), augurs well for long-term growth. By 2030, Ford expects EVs to account for 50% of its global sales, which will cement its position in the red-hot EV landscape. The company’s long-term expected EPS growth rate is 9.1%.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here


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