Last year, U.S. vehicle sales dropped to their lowest level in more than a decade as the auto industry was plagued by supply chain issues, high-interest rates, and tight inventories. However, Electric Vehicle (EV) sales accounted for 5.8% of all new cars sold in 2022, up from 3.1% in 2021.
With the ever-rising adoption of electric vehicles, investors who like the first mover in the EV space, Tesla, Inc. (TSLA), may want to take a look at fundamentally strong auto stocks Volkswagen AG (VWAGY), General Motors Company (GM) and Honda Motor Co., Ltd. (HMC). Let’s discuss why these stocks could prove to be solid investments.
As pent-up demand diminished, the auto industry found itself in trouble due to various supply and demand-related challenges. However, EVs found takers last year as they recorded an increase of almost two-thirds compared to 2021.
Although TSLA is still the market leader in the EV segment, its market share fell from 72% in 2021 to 65% in 2022. This shows that other automakers are quickly catching up on the EV trend and gaining market share.
According to Francis Scotland, director of global macro research at Brandywine Global Investment Management, “The auto sector is rebounding, and car prices are flattening out as normalizing supply factors lift production, inventories, and sales from depressed levels.”
With supply constraints easing and inflation showing a seventh straight month of annual decline in January, the auto industry looks set to benefit. Moreover, with EVs slowly forming a major part of automakers’ portfolios along with stricter emission norms, government subsidies on EVs, and public investment in charging infrastructure, the auto industry stands to benefit.
Therefore, investors can look to buy fundamentally strong auto stocks VWAGY, GM, and HMC. Let’s evaluate why these auto stocks could be wise investments.
Volkswagen AG (VWAGY)
Headquartered in Wolfsburg, Germany, VWAGY operates through four segments: Commercial Vehicles; Power Engineering; Financial Services; Passenger Cars, and Light Commercial Vehicles. The company also offers motorcycles. It provides its products under brands such as Volkswagen Passenger Cars, Audi, Škoda, Bentley, and Porsche, among others.
In terms of forward EV/EBITDA, VWAGY’s 6.38x is 35.2% lower than the 9.85x industry average. Its forward EV/Sales of 0.89x is 24.8% lower than the 1.18x industry average. Likewise, its 10.89x forward EV/EBIT is 20% lower than the 13.62x industry average.
On January 12, VWAGY announced significant progress in its electric transformation. Despite supply constraints and temporary production stops, the manufacturer delivered 26% more all-electric vehicles to customers around the globe.
Member of the Extended Executive Committee for Sales at VWAGY, Hildegard Wortmann, said, “Our brands have shown a decent performance regarding deliveries in a very challenging environment last year. The high order bank is a clear proof that customers love our entire strong product portfolio. That gives us confidence for 2023 despite weakening macroeconomics and ongoing supply shortages.”
For the fiscal third quarter that ended September 30, 2022, VWAGY’s sales revenue increased 24.2% year-over-year to €70.71 billion ($74.95 billion). The company’s gross result increased 42.1% from the prior-year quarter to €12.68 billion ($13.44 billion). Additionally, its operating result increased 64.5% year-over-year to €4.27 billion ($4.53 billion). Also, its earnings after tax came in at €2.13 billion.
VWAGY’s revenue for the quarter that ended December 31, 2022, is expected to increase 9.6% year-over-year to $76.29 billion. Its EPS for the fiscal year 2022 is expected to increase 100.4% year-over-year to $6.51. Over the past six months, the stock has gained 9.8% to close the last trading session at $17.76.
VWAGY’s POWR Ratings reflect solid prospects. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
Within the Auto & Vehicle Manufacturers industry, it is ranked #3 out of 61 stocks. The company has an A grade for Value and a B for Growth, Stability, and Quality. Click here to see the additional POWR Ratings of VWAGY for Momentum and Sentiment.
General Motors Company (GM)
GM designs, builds, and sells trucks, crossovers, cars, and automobile parts and accessories worldwide. The company operates through GM North America; GM International; Cruise; and GM Financial segments.
In terms of forward non-GAAP P/E, GM’s 6.27x is 56.6% lower than the 14.46x industry average. Likewise, its 6.88x forward EV/EBITDA is 30.2% lower than the 9.85x industry average.
On January 31, GM and Lithium Americas Corp. (LAC) announced that they would jointly invest in developing the Thacker Pass mine in Nevada, with GM investing $650 million in LAC. It is the most significant investment by an automaker to produce battery raw materials, and lithium carbonate from Thacker Pass would be used in GM’s Ultium battery cells.
For the fiscal fourth quarter that ended December 31, 2022, GM’s revenue increased 28.4% year-over-year to $43.11 billion. Its net income attributable to stockholders increased 14.8% year-over-year to $2 billion. In addition, its adjusted EPS came in at $2.12, representing a 57% increase from the year-ago quarter.
GM’s revenue for the quarter ending March 31, 2023, is expected to increase 9.1% year-over-year to $39.24 billion. Its EPS for the quarter ending June 30, 2023, is expected to increase 41.4% year-over-year to $1.61.
The company has a commendable earnings surprise history, surpassing the consensus EPS estimates in three of the trailing four quarters. The stock has gained 15.2% year-to-date to close the last trading session at $38.74.
GM’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, equating to Buy in our proprietary rating system. It is ranked #20 out of 61 stocks in the same industry. It has a B grade for Growth, Value, and Sentiment.
Click here to see the additional POWR Ratings of GM for Momentum, Stability, and Quality.
Honda Motor Co., Ltd. (HMC)
Headquartered in Tokyo, Japan, HMC develops, manufactures, and distributes motorcycles, automobiles, power products, and other products in Japan, North America, Europe, Asia, and internationally. It operates through four segments: Motorcycle Business; Automobile Business; Financial Services Business; and Life Creation and Other Businesses.
In terms of forward EV/Sales, HMC’s 0.60x is 49.3% lower than the 1.18x industry average. Likewise, its 11.34x forward EV/EBIT is 16.7% lower than the 13.62x industry average.
On January 13, LG Energy Solution and HMC announced a joint venture to produce lithium-ion batteries for electric vehicles produced by HMC. The joint venture is a major step toward an electrified future, and the two companies have committed to creating 2,200 jobs to establish the new production facility. This should benefit the company.
HMC’s sales revenue for the third quarter that ended December 31, 2022, increased 20.3% year-over-year to ¥4.44 trillion ($32.55 billion). The company’s operating profit increased 22.2% year-over-year to ¥280.49 billion ($2.06 billion). Its profit for the period attributable to owners of the parent increased 26.8% year-over-year to ¥244.66 billion ($1.79 billion).
Analysts expect HMC’s revenue for the quarter ending March 31, 2023, to increase 11.4% year-over-year to $33.37 billion. Its EPS for the fiscal year 2024 is expected to increase 0.3% year-over-year to $3.18. The stock has gained 7.3% over the past three months to close the last trading session at $25.97.
It is no surprise that HMC has an overall rating of A, translating to a Strong Buy in our proprietary rating system. It is ranked first in the Auto & Vehicle Manufacturers industry. In addition, it has an A grade for Value and a B for Stability, Sentiment, and Quality.
To see HMC’s ratings for Growth and Momentum, click here.
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VWAGY shares were unchanged in premarket trading Wednesday. Year-to-date, VWAGY has gained 13.52%, versus a 3.62% rise in the benchmark S&P 500 index during the same period.
About the Author: Malaika Alphonsus
Malaika's passion for writing and interest in financial markets led her to pursue a career in investment research. With a degree in Economics and Psychology, she intends to assist investors in making informed investment decisions.
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