Auto manufacturing juggernauts Tesla, Inc. (TSLA) and Honda Motor Co., Ltd. (HMC) have witnessed a large improvement in sales since the latter half of 2020. Thanks to the overall demand recovery in the auto sector, and ramped-up manufacturing capacity, these two companies are poised to climb further in the coming months. While TSLA has been the top-selling plug-in and electric car manufacturer, HMC has retained its position as one of the largest manufacturers of internal combustion engines.
The auto sector has been slowly and steadily returning to health after being battered by the pandemic last year. This revival should further boost the sales of TSLA and HMC. Although regaining pre-pandemic sales numbers could be challenging, the two companies have repositioned themselves to emerge stronger from the pandemic-induced crisis.
While TSLA gained 417.6% over the past year, HMC returned 25.9%. In terms of their past month’s performance, HMC is the clear winner with 0.3% gains versus TSLA’s negative returns. But which of these stocks is a better pick now? Let’s find out.
TSLA plans to roll out Tesla Cybertruck, Semi, and Roadster this year. Its electric pickup truck factory, the Gigafactory, is currently under construction and could be ready to build vehicles as soon as May this year. Also, last December, TSLA was finally added to the S&P 500 Index after five consecutive quarters of profit.
Last year, the company surpassed the half a million mark in electric cars produced and delivered. Moreover, TSLA’s Model Y production in Shanghai has commenced, with deliveries expected to begin shortly.
Also last year, HMC and General Motors (GM) signed a memorandum of understanding to accelerate innovation in electric vehicles (EVs) and collaborate on a variety of other segments to share common vehicle platforms in North America. The strategic relationship should allow HMC to invest significantly in future mobility technology and create new value for its customers.
Recent Financial Results
In the fourth quarter, ended December 31, 2020, TSLA’s total revenues increased 46% year-over-year to $10.74 billion. Its gross profit has risen 49% from the same period last year to $2.07 billion, while its non-GAAP net income grew 134% from the year-ago value to $903 million. However, its automotive gross margin was 24.1% over this period, versus 27.7% in the third quarter of 2020.
HMC’s sales revenue has increased 0.6% year-over-year to ¥3,771.5 billion in the fiscal third quarter, ended December 31, 2020, due primarily to an increase in sales revenue from its automobile business. The company’s operating profit rose 66.7% from the prior-year quarter to ¥277.7 billion, due mainly to increased efficiency of R&D expenditures and cost reduction efforts.
Expected Financial Performance
Analysts expect TSLA’s revenue to increase 66.7% in the current quarter, and 30.4% next year. The company’s EPS is expected to grow 34.3% next year. Moreover, its EPS is expected to grow at a rate of 32.1% per annum over the next five years.
In comparison, analysts expect HMC’s revenue to increase 249.7% in the current quarter, and 11.4% next year. The company’s EPS is expected to grow 36.2% next year. HMC’s EPS is expected to grow at a rate of 21.8% per annum over the next five years.
HMC’s trailing-12-month revenue is four times TSLA’s. But TSLA is slightly more profitable with a gross profit margin of 21% versus HMC’s 20.4%.
However, HMC’s net income margin of 3.2% and cash from operations of 11.62 billion compare favorably with TSLA’s 2.3% and 5.94 billion, respectively.
In terms of trailing-12-month price/sales, TSLA is currently trading at 19.76x, which is significantly higher than HMC, which is currently trading at 0.41x. Also, its trailing-12-month ev/sales of 20.19x is 2522.1% higher than HMC’s 0.77x.
So, HMC is the more affordable stock.
HMC has an overall A rating, which equates to a Strong Buy in our proprietary POWR Ratings system. However, TSLA has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
In terms of Value Grade, HMC has an A, which is in sync with its lower-than-industry ev/sales ratio. In comparison, TSLA has a Value Grade of F.
Both HMC and TSLA have a Momentum Grade of B, consistent with their price returns over the past year.
HMC has a Sentiment Grade of B, in sync with analysts’ expectations that earnings and revenue will increase. In comparison, TSLA has a grade of D for Sentiment.
Of the 51 stocks in the B-rated Auto & Vehicle Manufacturers group, HMC is ranked #1 while TSLA is ranked #35.
Beyond what I stated above, our POWR Ratings system also rates both HMC and TSLA for Growth, Stability, and Quality. Get all HMC’s ratings here. Also, click here to see the additional POWR Ratings for TSLA.
The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
While both TSLA and HMC are good long-term investments considering their market dominance and increased volumes of production, HMC appears to be a better buy based on the factors discussed here. We think HMC’s much lower relative valuation and higher profitability should help the stock perform better in the long run.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. If you’re looking for other top-rated stocks in the Auto & Vehicle Manufacturers group, click here.
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CAT shares were trading at $226.04 per share on Friday afternoon, up $6.28 (+2.86%). Year-to-date, CAT has gained 24.84%, versus a 4.98% rise in the benchmark S&P 500 index during the same period.
About the Author: Imon Ghosh
Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...
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