Is the Chevy Volt Too Affordable?

General Motors (NYS: 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 (NYS: 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 (NAS: 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. 

The article Is the Chevy Volt Too Affordable? originally appeared on Fool.com.

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.

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12 Comments

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Biffula

I make it a policy not to take financial advice from anyone that recommends leasing a vehicle. It just shows they don't know what they're talking about. They're called fleeces for a reason.

June 24 2012 at 4:29 PM Report abuse rate up rate down Reply
Jasonbaz

Poorly researched article.

June 23 2012 at 10:00 AM Report abuse rate up rate down Reply
MrEnergyCzar

I've spent $105 in "TOTAL" fuel costs in my Volt the first 10,300 miles.... driving is fun again..

MrEnergyCzar

June 22 2012 at 11:37 PM Report abuse rate up rate down Reply
Volt Driver

I didn't lease because of the amount of miles I put on my car every year. The car is still cheaper to own than myt 25k Mini Cooper after you include all costs... See my analysis below. And if you compare the Volt to the average car purchased last year (about 31k), the base Volt is only 1500 more after tax subsidies, and will cost you a LOT less to operate. My wife's new Honda CRV is costing us about $200 more a month than my 40k+ Volt.

http://voltowner.blogspot.com/2012/03/my-mileage-and-statistics-to-date.html

June 22 2012 at 3:30 PM Report abuse rate up rate down Reply
Las Paled

I went with the Volt lease and this article fully explained my rationale for doing so. I have a strong sense that I will be turning the car in in 2015 because they have already announced improvements that I want in the 2013 and 2014 models which I think will devalue the 2012 model. Risky move in announcing too much by GM but it made me more assured I made a correct choice in the lease.

June 22 2012 at 6:02 AM Report abuse rate up rate down Reply
JamesA

Here are the figures for my driving habits for 36 month Zero down leases , Gasoline $3.80 per gallon. 12,000 miles annually.
(Msrp $18,865 ) Chevy Cruze $255 + $131 gas = $386
Msrp $21,900 ) Chevy Cruze Eco $293 + $115 gas = $408
(Msrp $41,885) Chevy Volt $365 + $10 gas + 28 elec. = $403

Two weeks ago , I leased a Premium Volt for $365 a month

June 21 2012 at 10:49 PM Report abuse rate up rate down Reply
philblock

The basic trouble with the volt is that General Motors, like most auto mfgs. is a mechanical company. What I mean is that the engineering depts are run by mechanical engineers. Mechanical engineers hate and want nothing to do with electrical engineers. They don't understand electrical/electronics and don't want to. EEs are generally relagated to a secondary position and the MEs think they can do their job because they can change a light bulb. The ICE is slowly starting on a downhill trend and the engineering depts. will be dominated by EEs in the future. GM would do well to push the MEs aside and let some experienced EEs (over 35) get in there and straighten out the problems. Electrical/electronic components are the most dependable and cost wise products on the market and no mechanical contraption (water pump, carburetor, etc.) can compete with an electric motor, micro processor, etc. These are some of the reasons why a Fuel Cell car will eventually replace the ICE. And also why the auto mfgs. are dragging their feet on bringing out the Fuel Cell car. It will kill the auto companies as known today as the telegraph killed the pony express, the car killed the horse trade, and the PC destroyed so many computer companies, etc., etc..

June 21 2012 at 9:53 PM Report abuse rate up rate down Reply
ogden lafaye

The VOLT is having a lot of mechanical and electrical/electronic problems that GM is INSTANTLY covering through its website for VOLT owners. This highly complex engineering "marvel" is being subsidized by GM as it teeths its way into the future. A lot of development and improvement is needed. It is not a viable alternative to any mechanical engineer, thats for sure.

June 21 2012 at 3:06 PM Report abuse rate up rate down Reply
1 reply to ogden lafaye's comment
ViperRT10Matt

Consumer Reports surveys seem to disagree

http://news.consumerreports.org/cars/2011/12/2011-car-owner-satisfaction-chevrolet-volt-narrowly-edges-out-dodge-challenger-porsche-911.html

June 21 2012 at 3:41 PM Report abuse rate up rate down Reply
Volt Driver

Want a real Volt Owners experience? http://voltowner.blogspot.com

June 21 2012 at 2:33 PM Report abuse rate up rate down Reply
ViperRT10Matt

You forgot to mention that the "premium" for this option is very high.
-$900 acquisition fee that an outright buyer does not pay
-$300 disposition fee that an outright buyer does not pay
-Volts currently have 0% financing for buyers; interest rate on a lease is not 0% (added up to about $1200 for me)
-Some states offer further credits for electric cars that are not available to lessors ($3000 in my state)

After factoring in all of the above, my "cost" to lease was about $5000, which more than made up for any miscalculation in residual that Ally's professionals might have had.

June 21 2012 at 2:00 PM Report abuse rate up rate down Reply