Is the Chevy Volt Too Affordable?

General Motors (NYSE: GM  ) is on track to move 20,000 Volts this year. Despite Fox News' protests, perhaps the Chevy Volt is not a completely overpriced hunk of metal after all.

In fact, the problem for taxpayers may be that it's too affordable, not too expensive. Let me explain.

The Volt is actually an economical car
A Chevy Volt's lease starts at $369 a month with $0 due at lease signing (via Ally Financial). Not only does that appear cheap for a $40,000 car ($31,645 after incentives), but compared to similar sedans, it could be a steal.

For instance, my local Toyota (NYSE: TM  ) dealer is offering a lease on a yawn-inducing Toyota Camry of $289 per month with $0 down. And that's on a base Camry trim with an MSRP of $22,095 -- about half the Volt's. 

So for an additional $80 a month, Ally will lease you a car that is way cooler, way more expensive, and largely negates the need for gasoline. And if you drive less than 40 miles a day but more than 690 miles a month and use a free charging station (there's one by me), at $3.50 a gallon the Volt will actually be cheaper than a Camry. (Before anyone complains, I know gas prices fluctuate wildly, your mileage may vary, access to free charging stations varies, and this isn't a precise science. But you get the idea.)

Given this I'd choose the Volt over the Camry. I suspect so would many others, and hence why General Motors is on track to move 20,000 Volts this year. 

Yes, the Camry is technically a mid-size car, and the Volt is a compact. But I've been inside a Volt, and its quasi-hatchback design makes it plenty big provided you don't need a fifth seat. And we're talking about saving money over a Camry.

Could leasing a Volt make you money?
I've always philosophically liked the idea of leasing a car. A car is a depreciating asset, and as a general rule I don't like to own depreciating assets.

And in the case of the Volt, the economics of leasing may really work in the customer's favor. 

When you lease a car you get the option to buy the car at a fixed price at the end of the lease. This price (called the "residual value") is set in stone at the beginning of the lease. In other words, you get a European-style call option.

At the same time you also have the implicit right to "sell" the car back at that fixed price at the end of the lease, ending your payments. This can be thought of as a kind of European-style put option on the car. 

So what you end up having is a "straddle" position of the value of the car. As an options trader would say, you're "long volatility" or "long vol." If the value of the car at the end of the lease deviates significantly from the agreed upon residual value at the beginning of the lease, you can win big. The one big difference is that you're contractually obligated to exercise one of these two options with a lease, whereas with stock options you aren't obligated to exercise either. 

And in the case of the Volt, the potential for the price to differ from the agreed upon residual value is huge. 

Let's say, for example, that the Volt is a huge success and GM comes out with an even better Volt with 100 miles of EV range. 

The value of your Volt will plummet like any other piece of consumer electronics. But if you leased it you can simply turn it in to GM/Ally at the end of lease. You will then have implicitly forced Ally to pay above market value for your car, as they ended up "undercharging you" for the depreciation. You'll still need to lease or buy another car, but you will have avoided taking a bath on your Volt.

Now let's say that the Volt is a failure, GM stops making them, and they become a well sought after collector's item. 

In that case you can exercise the call option and buy the car from Ally at below market price, and then immediately sell it to a collector. If the price is high enough, you will have made a profit on your usage of the car. 

Yes, this is speculating and not investing. But the point is that with the Toyota Camry you don't even have the possibility of making money. With the Volt you do. 

What about GM shareholders?
In the above scenarios the real loser is not GM shareholders, but Ally Financial. General Motors only owns 9.9% of Ally, with 73.8% being owned by the U.S. Treasury.

If Ally has set the residual value too high (as I suspect) then the lease payments may be too low. By contrast, if they've set the residual too low then lessees will opt to buy the cars for less than Ally could have resold them for. 

The problem is that it's hard to properly price a lease on an EV since no one knows what they will sell for. This is why I think Tesla Motors (Nasdaq: TSLA  ) is avoiding leases (at least in the U.S.) for the time being. 

So it appears GM has made a smart decision in the Volt: It has found a way to make the cars affordable while offloading much of the risk to Ally, battery prices will likely continue their downward descent, and at some point GM's head start in electric power will give it an edge. This is all part of why I give GM a bullish CAPScall. 

Fool contributor Chris Baines is a value investor. Follow him on Twitter, where he goes by @askchrisbainesChris' stock picks and pans have outperformed 96% of players on CAPS. He owns no shares of the companies mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (18) | Recommend This Article (6)

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  • Report this Comment On June 21, 2012, at 3:39 PM, hbofbyu wrote:

    "And if you drive less than 40 miles a day but more than 690 miles a month and use a free charging station (there's one by me), at $3.50 a gallon the Volt will actually be cheaper than a Camry."

    Ummm $40,000 vs $22,00

    $18,000 difference will buy you 5,142 gallons of gasoline which equals about 164,500 miles of travel. About 10 years or more of operation. How can this possibly be cheaper than owning the Camry?

  • Report this Comment On June 21, 2012, at 3:58 PM, boogaloog wrote:

    hbofbyu,

    The article clearly stated monthly payments of $289 vs $369. At $3.50 per gallon for 690 miles you would have to get better than 34 mpg to make the Camry cost less -- at least as far as payment+gas. I have no idea what the insurance difference is.

  • Report this Comment On June 21, 2012, at 3:58 PM, boogaloog wrote:

    ^

    correction: 30 mpg

  • Report this Comment On June 21, 2012, at 4:18 PM, hbofbyu wrote:

    And at the end of 5 years you own the Camry and with the Volt you own nothing. Case closed.

  • Report this Comment On June 21, 2012, at 4:22 PM, hbofbyu wrote:

    Oops. sorry. I didn't realize you were also using a lease price on a Camry. My bad.

    My point is that I have never seen the value in leasing.

  • Report this Comment On June 21, 2012, at 4:49 PM, CluckChicken wrote:

    "My point is that I have never seen the value in leasing."

    I know enough people that just like getting a new car every 3-4 years and leasing works great for them. Doesn't work for me but to each their own.

    If I was to do this with my current daily 'joy' the Volt would come out about 1 tank a month cheaper then the Camry.

  • Report this Comment On June 21, 2012, at 4:58 PM, Taha123 wrote:

    I recently bought a car and the 2 cars I seriously considered were....2012 Chevy Volt or 2012 Toy Camry Hybrid. I test drove both cars, and the Camry Hybrid is A LOT bigger, faster, has more horsepower, better built, will hold its value better, and of course CHEAPER.

    I live in Houston and my commute is about 50 miles round trip. I was not gonna pay $45K minus $7.5K (with all the options I wanted on the Volt) for a car that's smaller than a Prius w/o power seats.

    I ended up paying $30K for the Camry Hybrid XLE with all the options I wanted (GPS, Backup camera, Entunes, Sat Radio, heated mirrors, etc...) I get about 45 mpg city in my Camry Hybrid.

  • Report this Comment On June 21, 2012, at 5:55 PM, GregKS wrote:

    Interesting article. 20,000 Volts in the what, the third year? Ford sold 600,000 Mustangs in its first year. And did not need incentives to do so.

    Chrysler's 200 Touring sells for $22,415 with 20/31 mpg. That is $9230 less than the Volt, or 2.397.4 gallons of gas @ $3.85/gallon. That's 67,127 miles at an average of 28 mpg.

    Ford's Focus 5D HB SE sells for $19,995 with 26/37 mpg. That's $11,650 less than the Volt, or 3,026 gallons of gas @ $3.85/gallon. 96,831 miles at an average of 32 mpg.

    You mention that charging stations are free, but we all know that will not last. The federal and state governments will decide that recharging a Volt at home does not include any road taxes and rectify that situation.

    So, a Volt is too cheap? Please, I resent having to subsidize someone to purchase a car of limited value from a government business just so some people can feel good about themselves. I also resent the fact that after I have subsidized them for their purchase, they get to drive free on the roads all the others of us have paid for through fuel taxes.

  • Report this Comment On June 21, 2012, at 7:52 PM, Darwood11 wrote:

    One more thing to consider with the Volt, or any electric car is the cost of installing a 220V adapter for rapid charge.

    I've seen costs quoted of $600-$1500 for electrics such as the Leaf or Volt.

    That's something else for the potential electric car owner or lessee to consider, and to investigate, before making the purchase.

    In general, I'm not a fan of car leases. I prefer to buy a new or slightly used demonstrator, and then run it into the ground.

    Here's some simple numbers. Assume a car costs $25,000 and the typical depreciation rate is 15% per year. Simplifications, I know. Then let's assume we buy it and drive it for 5 years. Then trade it in on a new car for the same price. We continue to do that for the span of 40 years.

    Alternatively, let's buy a new car for $25000 and trade it in at the end of 5 years on a new car of similar or equal value. We do that every 5 years, for 40 years.

    At the end of that time, we find we've spent nearly an additional $40,000 on automobiles. That's about $1000 each year. At $4 a gallon, that's 250 gallons. At 30 MPG, that means the annual savings pays for the gas for 7500 miles of driving.

    Or is my arithmetic bogus? I admit, this is a gross simplification. No fancy inflation numbers, linear depreciation and we assume the car will last that long and have a reasonable value after 10 years, and we assume linear maintenance costs. I also assume reasonable buying tastes in cars and no Yugos.

    If I'm wrong, perhaps I only get 5000 miles of "free" gas a year, while I drive my older car. That's the price one pays if they don't keep up with the Jones'es!

  • Report this Comment On June 21, 2012, at 8:08 PM, SuntanIronMan wrote:

    Question: Is there any reason in particular why you choose the Toyota Camry as your comparison vehicle?

    For about the same price (give or take a few dollars a month) with nothing down, you could lease a entry-level luxury car. Something like the 2012 Infiniti G, for example.

    Or if you want Toyota Camry prices, but something less "yawn-inducing", there are certainly many cars that would fit that requirement.

    I like the idea of electric cars. Heck, my next purchase might be one (though I'm not expecting to purchase a new car anytime soon). But I wouldn't say the Volt is cheap when you can get an entry-level luxury car for the same price. And the Volt, while a good car, is not entry-level luxury car quality.

    Although if you want an electric car, leasing is probably the best way to go. I normally wouldn't say that about leasing. But for electric cars, it seems to make more sense.

  • Report this Comment On June 21, 2012, at 8:11 PM, SuntanIronMan wrote:

    Opps. If the second paragraph of my above apply wasn't clear:

    "For about the same price [as the Chevy Volt]..."

  • Report this Comment On June 21, 2012, at 8:22 PM, SuntanIronMan wrote:

    Bah... "reply". Wish these comments had an edit button. Or I wish I would double check my replies before I hit 'Post Your Comment', lol.

    Also, quick thing. You might want to fix the disclosure notice at the end of the article for two of the companies you mentioned. The Fool owns shares of Tesla Motor. And the newsletter has recommended General Motors and Tesla Motors. (No mention about either.)

  • Report this Comment On June 21, 2012, at 9:48 PM, jeffhre wrote:

    GregKS,

    I resent having to pay over $10,000 generated in oil and gas subsidies over the lifetime of an ICE propelled vehicle. I resent adding to the balance of payments deficits by billions of dollars each year to import oil to fill everyone's gas tanks.

    That my friend seems just plain wrong. And the $7,500 tax credit, for buyers that qualify for the full amount, is designed to advance the development of the technologies that eliminate these noxious oil dependency costs, while immediately lowering the subsidies paid out to the importing of foreign oil.

  • Report this Comment On June 22, 2012, at 9:02 AM, FarrisKhan wrote:

    I lease a Chevy Volt.

    A few clarifications I think I can bring to the discussion:

    1. My higher payment is completely offset by fuel savings (even including electricity). $170/month more in payment... $170/month saved in fuel. My previous car was a Chevy Impala.

    2. I do think that the Camry is a very good comparison vehicle. It is the gold standard of mid-sized cars. It is also what is typically compared to a Prius, which is actually dimensionally smaller than a Volt. Another comparison would be the BMW 3-Series which is a top trade in vehicle for the Volt.

    The Volt compares very well with an entry level luxury BMW. It has 273ft-lbs of instant torque. The BMW only has 260ft-lbs of gear driven torque. It is heavier than a BMW, which makes it a little quick, but the heaviness also allows for very nice cornering ability and crash test results.

    Comparing horsepower makes no sense, because the gasoline generator does not power the wheels of the car, but rather sustains the charge of the battery.

    Its ride is much quieter. Its comes with two LCD displays, one of which is touch screen and Bluetooth and Onstar. It can be equipped with heater leather seats, a back up camera, and navigation.

    3. The Volt launched nationally on 11/1/2011. That is a little over 7 months, not 3 years.

    4. The $40K number is an amount that nobody actually pays.

    The MSRP of a base Volt is $31,645 after the tax credit that most people should be eligible for. According to EPA number published on its window sticker, a Volt saves $7600 in fuel compared to an average car. That makes the effective price of a Volt $24,045 when factoring in fuel savings and tax credits... $5000 LESS than the average new car.

    Buying a Volt is not as bad as it may appear. In retrospect, I do wish I had bought v. leased the Volt.

    5. Since the Volt has a gasoline generator, even if the battery degrades 10 years from now, a Volt driver is likely to get only perhaps only 75MPG (instead of my current 95MPG). Even if the battery cannot sustain any charge, a Volt driver can still likely drive it in charge sustaining mode and still get 38MPG in mixed driving, better than 95% of cars on the road.

  • Report this Comment On June 22, 2012, at 11:35 AM, GregKS wrote:

    Jeff,

    $10,000 in gas and oil subsidies over the life of the average car? Please cite references.

    There would be smaller balance of payment problems with countries that don't like us if we opened up oil exploration in this country.

    Once a Volt price drops to the $20,000 range without benefit of a subsidy, and gets 300 miles/charge, I might be tempted to purchase one.

    Greg

  • Report this Comment On June 22, 2012, at 5:25 PM, GregKS wrote:

    Getting back on topic, until GM can sell a sufficient number of Volts at a profit without government rebates, it will be too expensive.

    Greg

  • Report this Comment On July 24, 2012, at 5:28 AM, avakjas wrote:

    I chose the Volt over a Camry Hybrid and Prius , because the Volt has much better handling and built better . I get more than 300 Mpg instead of 40 . It’s also much quiet and fun to drive. Man those Toyota’s are boring and sloppy . My zero down Volt leases for $340 plus $30 in electricity for a total of $370 . A standard Camry leases for $289 + $120 in gas for a total of $409 a month .

  • Report this Comment On September 10, 2012, at 6:44 PM, GregKS wrote:

    Chris,

    I guess you were right, the Volt is too affordable.

    http://ca.news.yahoo.com/insight-gms-volt-ugly-math-low-sale...

    Greg

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