Due to solid demand, declining inflation, and easing supply chain concerns, the auto sector remains well-poised for growth despite the high-interest rates. With rate cuts expected next year, the auto industry will likely benefit.
Before diving deeper into the fundamentals of these stocks, let’s discuss why the auto industry is well-positioned for growth.
Auto sales have been strong this year due to falling inflation, easing supply chains, inventory availability, robust demand, etc. Demand has been robust across the auto industry, from new vehicles to auto parts. The auto industry is currently experiencing tailwinds from adopting battery electric vehicles (BEVs).
EV sales in the United States through the first nine months of 2023 are up nearly 50%, surpassing 2022’s total. Globally, more than 10 million electric cars were solid last year, and sales are expected to grow by another 35% this year to reach 14 million.
Globally, auto sales are expected to hit 86.8 million units in 2023, higher than the previous estimates of 86.4 million units. Despite the robust demand for automobiles, vehicle prices remain high. Moreover, the high-interest rates have made borrowing expensive. This has made affordability a concern for many new vehicle buyers.
This has prompted many prospective vehicle owners to keep their older vehicles longer. This has boosted the auto parts industry as older vehicles need more maintenance to keep them in running condition. Additionally, the auto parts industry is witnessing a boom due to the growing demand for cutting-edge components such as digital instrument clusters, smart infotainment and connectivity systems, advanced safety features, etc.
The auto parts industry is projected to grow at a CAGR of 3.8% to reach $3.03 trillion by 2028. Additionally, two-wheeled enthusiasm is boosting the demand for motorcycles. The global motorcycle market is projected to grow at a CAGR of 6.6% to reach $124.09 billion by 2030.
Let’s take a closer look at their fundamentals.
BorgWarner Inc. (BWA)
BWA provides solutions for combustion, hybrid, and electric vehicles worldwide. It offers turbochargers, eBoosters, eTurbos, timing systems, emissions systems, thermal systems, gasoline ignition technology, smart remote actuators, powertrain sensors, canisters, cabin heaters, battery modules and systems, battery packs, battery heaters, and battery charging.
On November 2, 2023, BWA has secured a significant deal to supply its bi-directional 800V Onboard Charger (OBC) to a major North American OEM’s premium electric vehicle platforms. The technology incorporates advanced silicon carbide (SiC) power switches, increases efficiency, and delivers amplified power density, power conversion, and safety compliance.
This achievement, the company’s first OBC win in North America, underscores BWA’s expertise in power electronics.
BWA’s 15.36% trailing 12-month Return on Common Equity is 39.7% higher than the industry average of 10.99%. Its 5.89% trailing-12-month levered FCF margin is 10.1% higher than the industry average of 5.34%. Additionally, its 5.36% trailing-12-month CAPEX/Sales is 70.6% higher than the industry average of 3.14%.
On the other hand, its 4.23% trailing-12-month net income margin is 3.7% lower than the industry average of 4.40%. Similarly, its 19.12% trailing-12-month gross profit margin is 46.4% lower than the industry average of 35.65%.
BWA’s net sales for the third quarter that ended September 30, 2023, increased 12.3% year-over-year to $3.62 billion. The company’s gross profit increased 7.4 over the prior-year quarter to $652 million. Its adjusted operating income increased 14.4% from the year-ago value to $349 million. Also, its adjusted EPS came in at $0.98, representing an increase of 22.5% year-over-year.
On the other hand, its net earnings attributable to BWA declined 81.7% year-over-year to $50 million.
Analysts expect BWA’s revenue for the quarter ending June 30, 2024, to increase 6.5% year-over-year to $3.91 billion. Its EPS for the quarter ending December 31, 2023, is expected to decline 26.9% year-over-year to $0.92. It surpassed the consensus EPS estimates in three of the four trailing quarters, which is impressive.
The stock has declined 2.5% year-to-date to close the last trading session at $34.52.
BWA’s bleak prospects are reflected in its POWR Ratings. It has an overall rating of C, translating to Neutral in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
Polaris Inc. (PII)
PII designs, engineers, manufactures, and markets powersports vehicles worldwide. It operates through three segments: Off-Road, On-Road, and Marine. The company offers off-road vehicles (ORVs); military and commercial ORVs; snowmobiles; motorcycles; moto-roadsters, quadricycles, and boats; and aftermarket parts and apparel.
PII’s 6.52% trailing 12-month net income margin is 48.4% higher than the industry average of 4.40%. Its 11.67% trailing-12-month EBITDA margin is 6% higher than the industry average of 11.01%. Additionally, its 8.94% trailing-12-month EBIT margin is 20.7% higher than the industry average of 7.40%.
On the other hand, its 3.42% trailing-12-month levered FCF margin is 36% lower than the industry average of 5.34%. Similarly, its 23.34% trailing-12-month gross profit margin is 34.5% lower than the industry average of 35.65%.
For the third quarter ended September 30, 2023, PII’s sales declined 3.9% year-over-year to $2.25 billion. Its adjusted gross profit decreased 9% over the prior-year quarter to $508.80 million. The company’s adjusted net income from continuing operations attributable to PII fell 19.7% year-over-year to $156.60 million. Also, its adjusted EPS from continuing operations attributable to PII came in at $2.71, representing a decline of 16.6% year-over-year.
On the other hand, its off-road segment’s sales rose 6% year-over-year to $1.84 billion. Moreover, its net cash provided by operating activities for nine months ended September 30, 2023, increased 231% year-over-year to $376 million.
Street expects PII’s EPS for the quarter ended December 31, 2023, to decline 24.8% year-over-year to $2.60. Its revenue for fiscal 2023 is expected to increase 3.5% year-over-year to $8.89 billion. It surpassed the consensus EPS estimates in three of the trailing four quarters. Over the past three months, the stock has declined 20.1% to close the last trading session at $91.55.
PII’s uncertain outlook justifies its overall rating of C, which translates to Neutral in our proprietary POWR Ratings system.
It is ranked #33 out of 52 stocks in the Auto & Vehicle Manufactures industry. It has a C grade for Momentum, Stability, and Quality. To see the other ratings of PII for Growth, Value, and Sentiment, click here.
Harley-Davidson, Inc. (HOG)
HOG manufactures and sells motorcycles in the United States and internationally. The company operates in three segments: Harley-Davidson Motor Company, LiveWire, and Harley-Davidson Financial Services.
On September 6, 2023, HOG’s board of directors authorized the company to repurchase up to an additional 10 million shares of HOG’s common stock. The authorization is in addition to the existing share repurchase authorization approved in February 2020. The share repurchase is expected to create value for shareholders.
On June 20, 2023, HOG announced the H-D Membership program to strengthen its community and engagement among riders and moto-culture enthusiasts under the United We Ride banner. This initiative, offering personalized experiences, benefits, and loyalty rewards, is expected to enhance customer loyalty and brand engagement, potentially boosting HOG’s prospects.
HOG’s 23.50% trailing 12-month Return on Common Equity is 113.8% higher than the industry average of 10.99%. Its 5.80% trailing-12-month Return on Total Assets is 50.4% higher than the industry average of 3.86%. Additionally, its 14.74% trailing-12-month EBIT margin is 99.1% higher than the industry average of 7.40%.
On the other hand, its 31.44% trailing-12-month gross profit margin is 11.8% lower than the industry average of 35.65%. Similarly, its 0.49x trailing-12-month asset turnover ratio is 51.2% lower than the 1x industry average.
HOG’s revenue for the third quarter ended September 30, 2023, declined 6% year-over-year to $1.55 billion. Its operating income decreased 38.2% over the prior-year quarter to $209.29 million. The company’s net income attributable to HOG fell 23.9% year-over-year to $198.65 million.
Its current assets increased 8.2% year-over-year to $5.42 billion. Additionally, its net cash provided by operating activities for nine months ended September 30, 2023, increased 23% year-over-year to $706.77 million.
For the quarter ending December 31, 2023, HOG’s revenue is expected to decline 5.5% year-over-year to $868.52 million. Its EPS for the quarter ending June 30, 2024, is expected to increase 5.3% year-over-year to $1.29. It has topped the Street EPS estimates in three of the trailing four quarters, which is impressive.
Over the past year, the stock has declined 36.5% to close the last trading session at $30.19.
HOG’s bleak prospects are reflected in its POWR Ratings. It has an overall rating of C, which translates to Neutral in our proprietary POWR Ratings system.
It has a C grade for Momentum. It is ranked #32 in the same industry. Click here to see the additional ratings of HOG for Growth, Value, Stability, Sentiment, and Quality.
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BWA shares were trading at $34.08 per share on Tuesday afternoon, down $0.44 (-1.27%). Year-to-date, BWA has declined -2.80%, versus a 19.74% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets. More...
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