Toyota Motor Corporation (TM) in Toyota City, and Honda Motor Co., Ltd. (HMC) in Tokyo, are two popular auto manufacturers based in Japan. TM manufactures and sells motor vehicles and related parts and accessories worldwide. The company provides robots, basic research projects, and marine and agribio businesses. It also operates GAZOO.com, a web portal for automobile information. In comparison, HMC develops, manufactures, and distributes motorcycles, automobiles, and power products worldwide. The company also sells spare parts and provides after-sales services through retail dealers directly and independent distributors and licensees.
The global automotive industry has been disrupted by the worldwide semiconductor chip shortage, supply chain issues, and multi-decade high inflation rates. In addition, surging energy prices and a shortage of raw materials due to the Russia-Ukraine war and COVID-19 lockdowns in China have taken a heavy toll on auto manufacturers of late.
However, consumers’ increasing interest in electric and autonomous vehicles and favorable government policies are incentivizing automakers to integrate advanced technologies into their fleets, and boost production. According to J.P. Morgan analysts, this should allow Japanese automakers to generate record profits this year. Investors’ optimism about this space is evident in the Global X Autonomous & Electric Vehicles ETF’s (DRIV) 3.7% returns over the past month versus the SPDR S&P 500 ETF’s (SPY) marginal decline. Therefore, both TM and HMC should benefit.
Click here to check out our Automotive Industry Report for 2022
TM shares are a winner with 0.5% gains over the past week versus HMC’s 0.2% loss. But which of these stocks is a better pick now? Let’s find out.
Latest Developments
Today, TM premiered online its new luxury crossover, the fifth generation RX, which has undergone a complete renewal, pursuing the Lexus Driving Signature performance and next-generation Lexus design. DIRECT4, a newly developed all-wheel-drive force system, has also been introduced that works in conjunction with a newly developed hybrid electric system to maximize the front and rear wheel grip and provide posture control. The "spindle body" used for the exterior design offers ample cooling functionality, along with advanced preventive safety technology that should allow Lexus Safety System to deliver a new user experience. This luxury crossover should see great demand in the future.
HMC’s Chinese subsidiary, Honda Motor (China) Investment Co., Ltd. (HMCI), announced that Chinese automobile manufacturer Dongfeng Honda Automobile Co., Ltd., and a joint venture between HMC and Dongfeng Motor Group, would begin sales of the all-new e:NS1 EV model on April 26, 2022. The all-new e:NS1 and e:NP1 will feature the latest connectivity technologies available in China, including Honda CONNECT 3.0, the new-generation connected technology developed exclusively for EVs, and a large 15.1-Inch display audio, and offers the driver monitoring camera (DMC), which assists safe driving by detecting potentially dangerous behavior. These EVs should see significant demand and broad market reach in the coming months.
Recent Financial Results
TM’s total sales revenues for its fiscal 2022 full year, ended March 31, 2022, increased 15.3% year-over-year to ¥31.38 trillion ($242.24 billion). The company’s operating income came in at ¥3 trillion ($23.13 billion), representing a 36.3% rise from the year-ago period. While its net income increased 18.8% year-over-year to ¥2.88 trillion ($22.19 billion), its EPS grew 29.1% to ¥205.23. As of March 31, 2022, the company had ¥6.11 trillion ($47.20 billion) in cash and cash equivalents.
For its fiscal 2022 full year, ended March 31, 2022, HMC’s sales revenue increased 10.5% year-over-year to ¥14.55 trillion ($112.34 billion). The company’s operating profit came in at ¥871.23 billion ($6.73 billion), representing a 32% rise from the prior-year period. Its net profit came in at ¥760.70 billion ($5.87 billion), up 9.4% from its year-ago period. HMC’s EPS came in at ¥411.09, indicating a 40.9% year-over-year improvement. As of March 31, 2022, the company had ¥3.68 trillion ($28.36 billion) in cash and cash equivalents.
Past and Expected Financial Performance
Over the past three years, TM’s EPS, tangible book value, and total assets have increased at CAGRs of 16.7%, 9%, and 9.2%, respectively. TM’s EPS is expected to increase 537.8% year-over-year in fiscal 2023, ending March 31, 2023. Its revenue is expected to grow 11.4% in fiscal 2023.
Over the past three years, HMC’s EPS, tangible book value, and total assets have grown at CAGRs of 5.9%, 5.8%, and 5.5%, respectively. Analysts expect HMC’s EPS to grow 4.7% year-over-year in fiscal 2023, ending March 31, 2023. Its revenue is expected to grow 380.7% year-over-year in fiscal 2023.
Valuation
In terms of forward EV/Sales, TM is currently trading at 1.46x, which is 135.5% higher than HMC’s 0.62x. And in terms of forward EV/EBITDA, HMC’s 11.23x compares with TM’s 7.53x.
Profitability
TM’s trailing-12-month revenue is 2.2 times HMC’s. TM is also more profitable, with a 15.4% EBITDA margin versus HMC’s 10.2%.
Furthermore, TM’s ROE, ROA, and ROTC of 11.2%, 2.9%, and 3.6%, respectively, compare with HMC’s 7.6%, 2.4%, and 3%.
POWR Ratings
While HMC has an overall A grade, which translates to Buy in our proprietary POWR Ratings system, TM has an overall C grade, which equates to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
Both TM and HMC have been graded a B for Stability, which is consistent with their lower volatility compared to the broader market. HMC has a 0.96 beta, while TM has a 0.64 beta.
HMC has an A grade for Value, which is in sync with its lower-than-industry valuation ratios. HMC’s 0.62x forward EV/Sales is 44.1% lower than the 1.11x industry average. TM’s C grade for Value reflects its slightly higher-than-industry valuation ratios. TM’s 1.46x forward EV/Sales is 31.4% higher than the 1.11x industry average.
Among the 68 stocks in the Auto & Vehicle Manufacturers industry, HMC is ranked #1, while TM is ranked #19.
Beyond what we have stated above, our POWR Ratings system has graded TM and HMC for Momentum, Quality, Sentiment, and Growth. Get all TM ratings here. Also, click here to see the additional POWR Ratings for HMC.
The Winner
Growing interest and rising investment in the electric vehicle industry should allow Japan-based auto manufacturers TM and HMC to benefit. However, TM’s global production cuts in recent months and higher valuations are a cause for concern. In comparison, its relatively lower valuations we think make HMC a better buy in a volatile market.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Ratings of Buy or Strong Buy. Click here to access the top-rated stocks in the Auto & Vehicle Manufacturers industry.
Click here to checkout our Electric Vehicle Industry Report for 2022
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TM shares were trading at $169.45 per share on Wednesday afternoon, up $3.08 (+1.85%). Year-to-date, TM has declined -8.55%, versus a -13.09% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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