Volkswagen AG (VWAGY) manufactures and sells automobiles primarily in Europe, North America, South America, and the Asia-Pacific. The Wolfsburg, Germany-based company operates in four segments: Passenger Cars and Light Commercial Vehicles; Commercial Vehicles; Power Engineering; and Financial Services. In comparison, Japan’s Toyota Motor Corporation (TM) designs, manufactures, assembles, and sells passenger vehicles, minivans and commercial vehicles, and related parts and accessories. It operates in Automotive; Financial Services; and All Other segments.
The global semiconductor shortage, supply chain crisis, and labor shortages have wreaked havoc on the auto manufacturing industry. However, massive government and private investments to boost semiconductor production should gradually ease the problem and help auto manufacturers boost production. Furthermore, the rising demand for electric vehicles (EVs) due to rising oil prices and climate change concerns should drive the industry’s growth. In addition, traditional automakers might benefit more than specialist EV manufacturers because of their broad portfolio of cars and market dominance. According to a report by Market Research Future, the automotive industry is expected to grow at a 4.5% CAGR between 2021 -2028. Therefore, both VWAGY and TM should benefit.
TM stock has gained 4.1% in price over the past month, while VWAGY has returned 1%. However, VWAGY’s 49.9% gains year-to-date are significantly higher than TM’s 20.3% returns. Moreover, VWAGY is the clear winner with 62.2% gains versus TM’s 32% returns in terms of the past year’s performance.
But which of these two stocks is a better buy now? Let us find out.
On November 3, 2021, VWAGY unveiled its new ID.5, and the sporty ID.5 GTX will launch in 2022. They tap into an entirely new market segment and advance VWAGY’s electric offensive in all vehicle classes within the framework of its ACCELERATE strategy. This is expected to help the company expand its reach in the electric vehicle space.
On October 29, 2021, TM announced a new $461 million investment to support Toyota Kentucky’s transformation plans. It is a series of changes and projects that will boost its Georgetown plant’s transformation to meet shifting customer demand, reduce its carbon footprint and advance future capabilities.
Recent Financial Results
VWAGY’s revenues decreased 4.1% year-over-year to €56.93 billion ($64.12 billion) for its fiscal third quarter, ended September 30, 2021. The company’s operating result declined 18.5% year-over-year to €2.60 billion ($2.92 billion). However, its earnings after tax came in at €2.90 billion ($3.27 billion), representing a 5.5% year-over-year increase. Also, its EPS was €5.51, up 6.6% year-over-year.
TM’s operating revenue increased 36.1% year-over-year to ¥15,481.30 billion ($135.88 billion) for its fiscal third quarter ended September 30, 2021. The company’s operating income grew 236.1% year-over-year to ¥1,747.47 billion ($15.34 billion), while its net income came in at ¥1,565.06 billion ($13.74 billion), representing a 148% year-over-year increase. Also, its adjusted EPS was ¥109.28 yen, up 144.1% year-over-year.
Past and Expected Financial Performance
VWAGY’s revenue and net income have grown at CAGRs of 2.8% and 11.4%, respectively, over the past three years. Analysts expect VWAGY’s revenue to increase 4.4% in the current year and 7% next year. The company’s EPS is expected to grow 184.1% in the current year and 5.2% next year. Moreover, its EPS is expected to grow at a 5.1% rate per annum over the next five years.
In comparison, TM’s revenue and net income have grown at CAGRs of 1.6% and 5.6%, respectively, over the past three years. The company’s revenue is expected to increase 9.2% in the current year and 8.1% next year. Its EPS is expected to grow 39.2% in the current year and 20.9% next year. Also, TM’s EPS is expected to grow at a 23% rate per annum over the next five years.
VWAGY’s trailing-12-month revenue is 1.05 times TM ‘s. However, TM is more profitable, with gross profit and net income margins of 19.87% and 10.03%, respectively, compared to VWAGY’s 18.96% and 7.23%.
Furthermore, TM’s 3.62% and 4.49% respective ROA and ROTC are higher than VWAGY’s 2.98% and 4.45%.
In terms of forward non-GAAP P/E, TM is currently trading at 9.07x, which is 66% higher than VWAGY’s 5.46x. And TM’s 10.86x forward EV/S ratio is 33.1% higher than VWAGY’s 8.16x.
So, VWAGY is relatively affordable here.
VWAGY has an overall B rating, which equates to a Buy in our proprietary POWR Ratings system. In contrast, TM has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.
VWAGY has an A grade for Value, which is consistent with its 8.16x forward EV/EBITDA, which is 22.1% lower than the 10.47x industry average. However, TM has a C grade for Value, which is in sync with its forward 10.86x EV/EBITDA, which is 3.8% higher than the 10.47x industry average.
Of the 62 stocks in the Auto & Vehicle Manufacturers industry, VWAGY is ranked #10. In contrast, TM is ranked #18.
The auto manufacturing industry is expected to grow with increasing demand for zero-emission vehicles. While both VWAGY and TM are expected to gain, we think it is better to bet on VWAGY now because of its lower valuation and better near-term growth prospects.
Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Auto & Vehicle Manufacturers industry here.
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VWAGY shares were trading at $31.28 per share on Tuesday afternoon, up $0.14 (+0.45%). Year-to-date, VWAGY has gained 51.69%, versus a 25.80% rise in the benchmark S&P 500 index during the same period.
About the Author: Nimesh Jaiswal
Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles. More...
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