Automotive giant Tesla, Inc. (TSLA) CEO Elon Musk and Twitter, Inc. (TWTR) are currently involved in a lawsuit, with Musk trying to get out of his agreement to acquire Twitter. The trial is set to begin on October 17, 2022, and with the momentum being with TWTR, Musk may need to sell more shares to TSLA to complete the acquisition, thereby increasing the potential downside risk for the stock.
Furthermore, yesterday, a fire broke out in the recycling plant of TSLA’s Gigafactory in Berlin. This comes roughly a week after a TSLA megapack battery installed at the storage facility of Pacific Gas & Electric Co (PCG) caught fire, leading to the disconnection of the facility from the grid.
TSLA’s shares have declined 7.4% over the past month and 31% year-to-date to close the last trading session at $276.01. Despite the recent decline, the stock is still trading at a frothy valuation of 64.7 times forward earnings.
On the other hand, the automotive industry is expected to enjoy sustained demand and ride the wave of increasing electrification. Furthermore, the CHIPS and Science Act should benefit automobile makers by strengthening manufacturing capabilities and supply chains.
According to a report by Mordor Intelligence, the North American automotive market is expected to grow at 6.6% CAGR to reach a valuation of $917.23 billion by 2027.
Hence, we suggest considering fundamentally strong automotive stocks Volkswagen AG (VWAGY) and Honda Motor Co., Ltd. (HMC), which have better growth prospects than TSLA.
Volkswagen AG (VWAGY)
VWAGY is a well-known automobile company based in Wolfsburg, Germany. It sells its automobiles in Europe, North America, South America, and Asia-Pacific. The company operates through four segments: Passenger cars and Light Commercial Vehicles; Commercial Vehicles; Power Engineering; and Financial Services.
On September 26, it was announced that PowerCo, the new battery subsidiary of VWAGY and Umicore, founded a joint venture for European precursor and cathode material production.
Since active cathode materials are the most significant contributor to overall battery cost and key to a successful transition to electric mobility, this collaboration is expected to improve the company’s bottom line.
On September 5, VWAGY announced its plans to raise capital with the IPO of its world-famous car brand Porsche with a target valuation of up to €75 billion ($72.29 billion). To that end, the company has entered into a share purchase agreement with Porsche Automobile Holdings SE (POAHY).
On August 22, VWAGY and Mercedes-Benz Group AG signed agreements with Canada to secure access to raw materials for battery production, such as nickel, cobalt, and lithium. This agreement is expected to streamline the supply chain and ensure smooth operations in the USA.
For the fiscal 2022 second quarter ended June 2022, VWAGY’s sales revenue increased 3.3% year-over-year to €69.54 billion ($67.03 billion). For the half year ended June 2022, the company’s earnings after tax improved 25.8% year-over-year to €10.64 billion ($10.26 billion), while the EPS increased 27.1% from its year-ago value to €20.51.
Analysts expect VWAGY’s revenue for the third quarter ending September 2022 to increase 5.4% year-over-year to $69.51 billion. The consensus revenue estimate of $276.24 billion for the next year ending December 2023 indicates a 3.7% year-over-year increase.
The stock has dipped 3.5% over the past month to close the last trading session at $18.33.
VWAGY’s POWR Ratings reflect this promising outlook. The company has an overall rating of A, which translates to Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
VWAGY also has B grades for Value, Stability, and Quality. Within the Auto-Vehicle Manufacturers industry, it is ranked #2 of 64 stocks.
To see additional POWR Ratings for VWAGY for Growth, Momentum, and Sentiment, click here.
Honda Motor Co., Ltd. (HMC)
Headquartered in Tokyo, Japan, HMC designs, manufactures, and sells motorcycles, automobiles, power products, and other products globally. The company operates through four segments: Motorcycle Business; Automobile Business; Financial Services Business; and Life Creation and Other Businesses.
On September 2, 2022, HMC announced the acquisition of 1.9% of its issued shares worth a maximum amount of ¥100 billion ($693.4 million) to improve the efficiency of its capital structure. This promises to be a positive development for existing shareholders with the potential for an increase in EPS.
On August 29, HMC and LG Energy Solution announced an agreement to establish a joint venture to produce lithium-ion batteries in the U.S. to power Honda and Acura EV models for the North American market by the end of 2025. Both companies plan to invest a total of $4.4 billion, with HMC’s share amounting to $1.7 billion.
On July 16, HMC announced the signing of a Memorandum of Understanding with Sony Group Corporation (SONY) to establish a joint venture to develop, sell and commercialize high-value-added battery electric vehicles (EVs) and allied services.
HMC’s sales revenue increased 6.9% from the prior-year quarter to ¥3.83 trillion ($26.56 billion) in the fiscal 2022 first quarter ended June 30, 2022. The company’s operating profit from Motorcycle Business came in at ¥97.80 billion ($678.15 million), up 21.2% year-over-year.
Analysts expect HMC’s revenue for the fiscal year 2023 (ending March 2023) to come in at $118.39 billion, indicating an increase of 343.2% year-over-year. The company’s EPS for the current year is expected to grow 18.8% from the previous year to $3.26. Also, HMC has surpassed the consensus revenue estimates in each of the trailing four quarters.
HMC’s stock has declined 15.3% over the past month to close the last trading session at $22.81.
HMC's stable outlook has earned it an overall POWR Rating of B, which translates to a Buy in our proprietary rating system. It has an A grade for Value and a B for Quality and Stability. In the same industry, it is ranked #7 of 64 stocks.
Beyond what we’ve discussed above, we have also given HMC grades for Growth, Momentum, and Sentiment. Get all HMC ratings here.
TSLA shares were trading at $282.35 per share on Tuesday afternoon, up $6.34 (+2.30%). Year-to-date, TSLA has declined -19.85%, versus a -22.68% rise in the benchmark S&P 500 index during the same period.
About the Author: Santanu Roy
Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.
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