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Fair Market Value

Sigma Investment Counselors

August 10, 2018

Fair market value is generally described as the price that a knowledgeable, willing and unpressured buyer would pay to a knowledgeable, willing and unpressured seller.

Investors may soon have an opportunity to observe the impact on price when the seller faces legislated pressure.

California and nine other states have inaugurated a Zero Emission Vehicle (ZEV) program that requires automakers to sell electric cars and trucks in increasing percentages of their total vehicle sales.

While the details are complex, the net effect is a major effort on the part of most of the major participants in the U.S. vehicle market to develop and market ZEVs.  During the development phase, many auto manufacturers have complied by buying ZEV credits.  Primarily due to cost factors, this is not a long-term solution.  Accordingly, the industry is preparing to begin to aggressively market a wide range of ZEVs.

Investors might want to consider that the small number of ZEVs currently available have reportedly been selling at a loss.  Moreover, there has not been any evidence of broad consumer interest in ZEVs.  If the major manufacturers, particularly Ford and GM, want to continue to sell high margin trucks and SUVs in the ZEV mandate states, they will probably have to accept the possibility that ZEV sales may be at a loss.

If this proves to be the case, it will be difficult for anyone to make money on ZEV sales in the ZEV mandate states.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA

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