High prices and rising borrowing rates have marred the auto industry’s optimal performance. According to a recent survey, 49% of respondents said they did not intend to purchase a new car in 2023.

However, consumer spending has remained strong in the last month. Retail sales in January 2023 increased by 3%, with auto sales contributing the most to the surge. Moreover, growing electric vehicle (EV) demand is expected to bolster growth in the auto industry. The Global Electric Vehicle Market is projected to grow at a CAGR of 23.1% from 2023 to 2030.

Furthermore, according to TrendForce, global car sales are estimated to increase by 3.8% year-over-year to 84.10 million vehicle units in 2023.

Given the backdrop, investors could consider buying quality auto stock General Motors Company (GM) now. However, fundamentally weak Nikola Corporation (NKLA) might be best avoided.

Stock to Buy:

General Motors Company (GM)

GM designs, builds, sells trucks, crossovers, cars, and automobile parts, and provides software-enabled services and subscriptions worldwide. The company operates through GM North America; GM International; Cruise; and GM Financial segments.

On February 9, 2023, GM and GlobalFoundries Inc. (GFS) announced a strategic, long-term agreement establishing a dedicated capacity corridor exclusively for GM’s chip supply. This agreement is expected to strengthen GM’s supply chain.

GM’s forward EV/Sales of 0.95x is 22.9% lower than the industry average of 1.23x. Its forward Price/Sales of 0.37x is 61% lower than the industry average of 0.96x.

GM’s trailing-12-month EBITDA and net income margin of 11.37% and 6.34% are 2.9% and 31.7% higher than the industry averages of 11.05% and 4.81%.

GM’s revenue came in at $43.11 billion for the fourth quarter that ended December 31, 2022, up 28.4% year-over-year. Its adjusted EBIT increased 33.8% year-over-year to $3.80 billion, while its adjusted EPS came in at $2.12, representing a 57% increase year-over-year.

Analysts expect GM’s revenue to increase 3.3% year-over-year to $161.83 billion in the current fiscal year 2023. Its EPS is expected to increase by 15.7% per annum for the next five years. It surpassed EPS estimates in three of four trailing quarters. Over the past month, the stock has gained 17.9% to close the last trading session at $43.17.

GM’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which indicates a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

GM has a B grade for Growth, Value, and Sentiment. In the Auto & Vehicle Manufacturers industry, it is ranked #19 out of 61 stocks. Click here for the additional POWR Ratings for Momentum, Stability, and Quality for GM.

Stock to Avoid: 

Nikola Corporation (NKLA)

NKLA operates as a technology innovator and integrator that works to develop energy and transportation solutions. It operates through two business units, Truck and Energy.

NKLA’s forward EV/Sales of 16.84x is 820.5% higher than the industry average of 1.83x. Its forward Price/Sales of 17.07x is substantially higher than the industry average of 1.42x.

NKLA’s trailing-12-month ROCE and ROTC of negative 113.47% and 55.93% are lower than the industry averages of 13.99% and 6.76%.

NKLA’s cash and cash equivalents came in at $315.73 million for the period that ended September 30, 2022, compared to $497.24 million for the period that ended December 31, 2021, while its current assets came in at $486.92 million, compared to $524.73 million.

Street expects NKLA’s EPS to decline 87% year-over-year to negative $0.43 for the yet-to-be-reported quarter ending December 2022. Its EPS is expected to remain negative for fiscal 2022 and 2023. Over the past month, the stock has lost 3.5% to close the last trading session at $2.51.

NKLA’s POWR Ratings reflect its poor prospects. It has an overall F grade, equating to a Strong Sell in our POWR Ratings system.

It has an F for Stability and Quality and a D for Growth, Value, and Sentiment. It is ranked last in the same industry. To see NKLA ratings for Momentum, click here.

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GM shares were unchanged in premarket trading Monday. Year-to-date, GM has gained 28.33%, versus a 6.49% rise in the benchmark S&P 500 index during the same period.

About the Author: Riddhima Chakraborty

Riddhima is a financial journalist with a passion for analyzing financial instruments. With a master's degree in economics, she helps investors make informed investment decisions through her insightful commentaries. More...

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