UK-based Rolls-Royce Holdings plc (RYCEY) and Japan-based Toyota Motor Corporation(TM) are two behemoths in the automotive industry. As the second quarter of the year nears, I think RECEY is poised to outshine TM.

Rapid population growth, urbanization, infrastructure development, and industrial expansion are set to boost commercial vehicle sales.

According to a joint report by industry consultants J.D. Power and GlobalData, U.S. new vehicle sales are expected to increase by 1.4% in February 2024 compared to the previous year. This growth is attributed to robust demand and improved vehicle supply. The report estimates total new vehicle sales in the United States, including retail and non-retail transactions, to reach 1.20 million units in February.

Moreover, Federal Reserve Chair Jerome Powell and colleagues are considering easing inflation-fighting efforts after raising interest rates to a two-decade high. This shift, signaling a pause in rate hikes and potential cuts, could fuel growth in the automotive sector. With the potential decline in interest rates, the U.S. new vehicle sales are predicted to edge up by 1% to 15.70 million units this year.

Additionally, mounting apprehensions regarding climate change and air pollution are fueling greater interest in electric vehicles (EVs) as a more environmentally friendly option. This surge in demand for electric and hybrid vehicles globally is expected to drive significant growth within the industry.

The global automotive market is projected to grow at a CAGR of 6.9% until 2030. On top of that, the global electric vehicle market is expected to grow at a CAGR of 13.7% until 2030.

RYCEY outperforms in terms of price performance, with a remarkable 205.3% gain over the past year, surpassing TM’s 82.6% increase. Moreover, in the last six months, RYCEY surged by 92.2%, while TM saw a gain of 30.7%.

So, here are the reasons why I believe RYCEY could outperform in the near term:

Recent Developments

On March 18, RYCEY appointed WSP, one of the world’s leading professional services consulting firms, as its non-fissile design partner for expanding its Raynesway site, marking a significant milestone. This expansion aims to double the size of the Submarines site in Derby to meet Royal Navy demand and AUKUS-related growth.

On February 6, TM announced a $1.30 billion investment in its Kentucky facility for future electrification efforts, including assembling a new three-row battery electric SUV for the U.S. market. This brings the total investment in the plant to nearly $10 billion and underscores TM’s commitment to quality vehicles and job stability.

Recent Financial Results

During the fiscal year that ended December 31, 2023, RYCEY’s underlying revenue increased 21.4% year-over-year to £15.41 billion ($19.61 billion). The company’s underlying operating profit grew 143.9% from the past year to £1.59 billion ($2.02 billion). Its underlying profit for the period from continuing operations came in at £1.14 billion ($1.45 billion), up 622.8% from the previous year.

On the contrary, TM’s total revenues rose 23.9% year-over-year to ¥34.02 trillion ($224.66 billion) for the fiscal nine months that ended December 31, 2023. Its operating income grew 102.1% year-over-year to ¥4.24 trillion ($28 billion). Net income attributable to TM increased 107.9% from the prior year to ¥3.95 trillion (26.08 billion).

Past And Expected Financial Performance

RYCEY’s revenue and EBITDA have increased at a CAGR of 12.8% and 118.6% over the past three years. This year, its revenue is expected to increase 26.9% from the previous year and EPS is expected to increase 8.8% year-over-year.

Conversely, TM’s revenue and EBITDA have increased at a CAGR of 50.4% and 23.1% over the past three years. Its revenue and EPS are expected to increase by 764.3% and 1.1% from the previous year this year.

Valuation

RYCEY’s forward P/S multiple of 2.01 is higher than TM’s 1.11%. RYCEY’s forward EV/Sales multiple of 2.13x is also higher than TM’s 1.62x.

Thus, TM is more affordable.

Profitability              

RYCEY and TM currently boast trailing-12-month net income margins of 14.63% and 10.29%, respectively, surpassing the industry average of 4.72%.

However, RYCEY’s trailing-12-month gross profit margin of 22.12% is higher than TM’s 19.86%. In addition, RYCEY’s trailing-12-month net income margin of 9.80% is higher than TM’s 11.21%.

Thus, RYCEY is more profitable.

POWR Ratings

RYCEY has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. Conversely, TM has an overall rating of C, translating to a Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. RYCEY’s B grade for Quality is consistent with its trailing-12-month EBIT and net income margins of 11.11% and 14.63%, which are higher than the industry averages of 10.01% and 5.92%.

TM has a C grade for Quality. Its trailing-12-month net income margin of 10.29% is 117.9% higher than the industry average of 4.72%. But its trailing-12-month asset turnover ratio of 0.56x is 43.6% lower than the industry average of 0.99x.

In the 53-stock Auto & Vehicle Manufacturers industry, RYCEY is ranked #9, while TM is ranked #26. 

Beyond what we’ve stated above, we have also rated both stocks for Value, Momentum, Sentiment, and Quality. Get all RYCEY ratings here. Click here to view TM ratings.

The Winner

The automotive industry is poised for growth amidst evolving market trends. Projected upticks in U.S. new vehicle sales and potential easing of inflation-fighting measures signal positive momentum. Additionally, mounting concerns about climate change are boosting demand for electric vehicles globally.

In this dynamic environment, industry leaders like RYCEY and TM are well-positioned to capitalize on these opportunities and drive innovation in the automotive sector.

However, backed by superior profitability metrics and impressive price performance, I think RYCEY is poised to lead the automotive landscape for the upcoming quarter.

Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Auto & Vehicle Manufacturers industry here.  

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RYCEY shares were trading at $5.30 per share on Thursday afternoon, up $0.11 (+2.12%). Year-to-date, RYCEY has gained 40.21%, versus a 10.44% rise in the benchmark S&P 500 index during the same period.

About the Author: Kritika Sarmah

Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities. More...

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