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Is the Chevy Volt Too Affordable?

By Chris Baines - Updated Apr 7, 2017 at 2:38PM

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<class=Heading5Char>The Volt Is Cheaper Than You Think

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. 

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