The performance of legacy auto companies in the third quarter of 2025 may have surprised some investors. Same for the steep decline in EV adoption, while internal combustion engine and hybrid vehicles sales stay steady.

But, our readers should not be surprised. We’ve predicted this turn of events since the early days of EVs.

Our Long Idea this week recently beat both top- and bottom-line estimates in 3Q25 and raised full year 2025 guidance. After the results, the company’s stock jumped significantly.

With the recent jump in stock price, investors may think it’s time to pump the brakes. On the contrary, we think it’s time to step on the gas.

We hope you enjoy this latest piece of free research. It is from our latest Long Idea report published this week, available to Pro and Institutional members. You can buy the full report a la carte here.

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This stock offers favorable Risk/Reward based on the company’s:

  • improving market share in key markets,
  • ability to transition between ICE and hybrid vehicle manufacturing,
  • superior profit margins compared to peers,
  • strong dividends and buybacks, and
  • cheap stock: current price implies profits will permanently decline from current levels.

Legacy OEMs Remain on Top

Our overarching thesis on the auto industry remains intact: the death of legacy automakers is greatly exaggerated. History has shown that legacy automakers can build hybrid and EVs, while generating billions in cash flow from legacy internal combustion engine (ICE) production. The ability to serve multiple markets provides lasting competitive advantages.

As 2025 nears its end, our thesis looks stronger than ever. Automakers such as Tesla (TSLA) reported year-over-year (YoY) declines in vehicle deliveries while legacy OEMs continue to achieve strong internal combustion engine (ICE) and hybrid vehicle deliveries.

Solid Fundamentals for More Than a Decade

This company has grown both revenue and net operating profit after-tax (NOPAT) by 2% compounded annually from 2010 through the TTM ended 3Q25. See Figure 1. More recently, the company has grown revenue and NOPAT by 6% and 3% compounded annually since 2019.

Figure 1: Revenue and NOPAT: 2010 – TTM ended 3Q25

Sources: New Constructs, LLC and company filings

The company’s Core Earnings, a proven superior earnings measure that excludes unusual gains/losses, grew 2% compounded annually from 2010 through the TTM.

Investors only analyzing GAAP net income may not realize just how profitable this company is. The company’s Core Earnings are higher than GAAP net income in each of the three last fiscal years as well as the TTM. Over the TTM, the company’s Core Earnings are $8.5 billion while GAAP net income is $4.8 billion.

Identifying differences in Core Earnings and GAAP Earnings, or what we call Earnings Distortion, drives novel alpha, as proven by the Bloomberg New Constructs Core Earnings Leaders Index, which has outperformed the market by 10 percentage points year-to-date through October 29. The index tracks the 100 companies whose Core Earnings exceed GAAP earnings by the most relative to the size of the company.

Significant Cash Flow Generation

This company has generated large cash flows for over a decade now, and recent results look just as strong as in the past.

The company generated a cumulative $45.0 billion (60% of enterprise value) in free cash flow (FCF) from 2014 through 3Q25. See Figure 2. Over the TTM, the company generated $7.9 billion in FCF.

Figure 2: Cumulative Free Cash Flow Since 2014

Sources: New Constructs, LLC and company filings

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