Last year was challenging for automotive stocks as rising interest rates, supply chain disruptions, high inflation, and a slowing global economy hammered automobile shares. The Dow Jones U.S. Auto Manufacturers Index has plunged 60.8% over the past year.
However, carmakers are optimistic that sales will rebound in 2023. Vehicle inventories are showing signs of improvement, indicating that vehicle prices would reduce, positioning auto manufacturers better to meet pent-up demand.
In addition, Cox Automotive forecasted new vehicle sales in 2023 to increase by 3% year over year to 14.1 million units. Meanwhile, Edmunds estimated a 7% increase in new vehicle sales this year from their projected 13.8 million new vehicle sales in 2022.
Moreover, the global electric vehicle market is projected to reach $628 billion by 2029, growing at a CAGR of 16.4%, driven by the growing demand for commercial electric vehicles in the goods transportation market.
Given this backdrop, it could be wise for investors to buy fundamentally sound yet cheap auto stocks Stellantis N.V. (STLA) and Honda Motor Co., Ltd. (HMC), trading under $25, which look poised to generate impressive returns in the near term.
Stellantis N.V. (STLA)
Headquartered in Hoofddorp, Netherlands, STLA designs, engineers, manufactures, distributes, and sells vehicles, components, and production systems. The company’s brand portfolio includes Abarth, Alfa Romeo, Chrysler, Dodge, Fiat, Fiat Professional, Jeep, Lancia, Ram, Peugeot, Citroen, DS Automobiles, Opel and Vauxhall, and Maserati.
On January 9, STLA signed a binding agreement with Element 25 Limited to supply high-purity manganese sulfate monohydrate used for electric vehicle batteries. The five-year agreement calls for shipments to begin in 2026, with provisions to extend the term and increase volumes. With this agreement, STLA strengthens its value chain for EV battery production, thereby supporting its Dare Forward 2030 strategic plan targets.
On December 23, 2022, the company announced its plans to acquire a stake in Symbio, a Faurecia Michelin hydrogen company and fuel cell technologies provider for the mobility industry. Also, on December 22, STLA acquired aiMotive, a developer of advanced artificial intelligence and autonomous driving software. Such lucrative acquisitions are expected to bolster the company’s future productivity.
Its four-year average dividend yield is 10.5%, and its forward annual dividend translates to a 7% yield. The company’s dividend has grown at a 17.3% CAGR over the past three years.
STLA’s net revenues rose 21.2% year-over-year to €88 billion ($94.98 billion) for the half-year that ended June 30, 2022. The company’s adjusted operating income increased 46.6% year-over-year to €12.37 billion ($13.35 billion), while its net profit increased 37.2% year-over-year to €7.96 billion ($8.59 billion).
Additionally, its net revenue for the third quarter ended September 30, 2022, came in at €42.10 billion ($45.44 billion), up 29.1% from the prior-year quarter, reflecting higher volumes, continued strong net pricing, and favorable FX translation effects.
In terms of forward non-GAAP P/E, STLA is trading at 2.83x, 80.1% lower than the industry average of 14.20x. The stock’s forward EV/Sales multiple of 0.16 is 86.4% below the industry average of 1.19. Also, its forward EV/EBIT multiple of 1.28 compares to the industry average of 13.55.
Street expects STLA’s revenue and EPS to increase 11.4% and 0.5% year-over-year to $191.48 billion and $5.66, respectively, for the fiscal year ended December 2022. The stock has gained 36.2% over the past three months to close the last trading session at $16.03.
STLA’s POWR Ratings reflect this promising outlook. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It also has an A grade for Value and a B for Stability and Sentiment. It is ranked #8 of 62 stocks in the Auto & Vehicle Manufacturers industry. To see the other ratings of STLA for Growth, Momentum, and Quality, click here.
Honda Motor Co., Ltd. (HMC)
Headquartered in Tokyo, Japan, HMC produces and sells motorcycles, automobiles, and power products. It also sells spare parts and provides after-sales services directly through retail dealers, independent distributors, and licensees. The company operates through four business segments: Motorcycle; Automobile; Financial service; and Life creation.
On January 13, LG Energy Solution and HMC entered into a JV agreement to produce lithium-ion batteries for electric vehicles. The plant aims to have an annual production capacity of approximately 40GWh. All batteries produced by the new JV would be supplied exclusively to HMC plants in North America to power battery-electric vehicles. This strategic alliance is expected to generate substantial revenues in the upcoming years.
HMC’s four-year average dividend yield is 3.39%, and its forward annual dividend translates to a 7.41% yield. The company’s dividend has grown at a 6.7% CAGR over the past three years.
For the fiscal second quarter that ended September 30, 2022, HMC’s sales revenue increased 25% year-over-year to ¥4.26 trillion ($32.58 billion). Its operating profit rose 16.2% year-over-year to ¥231.20 billion ($1.77 billion), while its profit for the year attributable to owners of the parent came in at ¥189.20 billion ($1.45 billion), up 13.6% from its year-ago period.
HMC’s 0.56x forward EV/Sales is 51.9% lower than the 1.16x industry average. Its 6.98x forward EV/EBITDA is 27.7% lower than the 9.65x industry average. Also, its forward Price/Sales multiple of 0.31 compares to the industry average of 0.91.
For the third quarter (ended December 31, 2022), HMC’s revenue is expected to increase 7.7% year-over-year to $34.39 billion. Its EPS is expected to increase by 13.2% per annum over the next five years. Shares of HMC have gained 10.8% over the past three months to close the last trading session at $24.10.
It is no surprise that HMC has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. It has an A grade for Value and a B for Stability and Quality. Within the same industry, it is ranked #6.
In addition to the POWR Rating grades I’ve just highlighted, you can see the HMC ratings for Growth, Momentum, and Sentiment here.
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STLA shares were trading at $15.41 per share on Friday afternoon, down $0.62 (-3.87%). Year-to-date, STLA has gained 8.52%, versus a 4.15% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions. More...
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