The auto industry is expected to continue to grow for the foreseeable future, driven by high demand and supportive federal initiatives. Despite being a dominant player in the auto industry, Tesla (TSLA) may not be a good choice right now due to its high valuation and near-term uncertainties. Instead, we think fundamentally strong auto stocks Volkswagen (VWAGY) and Honda (HMC) are better positioned to take advantage of the sector’s long-term growth prospects. Keep reading….
Automotive giant Tesla, Inc. (TSLA) CEO Elon Musk and Twitter, Inc. (TWTR) are currently embroiled in a lawsuit, with Musk trying to evade his agreement to take over Twitter. The trial will begin on October 17, 2022 and with the be momentum with TWTRMusk may need to sell more shares to TSLA to complete the acquisition, increasing the potential downside risk to the stock.
Furthermore, a fire broke out yesterday at the recycling plant of TSLA’s Gigafactory in Berlin. This comes about a week after a TSLA megapack battery was installed at Pacific Gas & Electric Co.’s storage facility (PCG) caught fire, disconnecting the installation from the grid.
Shares of TSLA are down 7.4% in the past month and 31% so far to close out the last trading session at $276.01. Despite the recent decline, the stock still trades at a frothy valuation of 64.7 times future earnings.
On the other hand, the auto industry is expected to enjoy sustained demand and ride the wave of increasing electrification. In addition, the CHIPS and Science Act should benefit automakers by strengthening manufacturing capabilities and supply chains.
According to a report by Mordor Intelligence, the North American auto market is expected to grow by 6.6% CAGR to reach a valuation of $917.23 billion by 2027.
Volkswagen AG (VWAGY)
VWAGY is a well-known car company based in Wolfsburg, Germany. It sells its cars in Europe, North America, South America and Asia-Pacific. The company operates through four segments: passenger cars and light commercial vehicles; commercial vehicles; energy technology; and financial services.
On September 26, it was announced that PowerCo, the new battery subsidiary of VWAGY and Umicore, has established a joint venture for the European production of precursors and cathode materials.
As active cathode materials are the main contributor to overall battery costs and key to a successful transition to electric mobility, this partnership is expected to improve business outcomes.
On September 5, VWAGY announced its plans to raise capital with the IPO of the world-renowned car brand Porsche with a target value of up to €75 billion ($72.29 billion). To this end, the company has entered into a share purchase agreement with Porsche Automobile Holdings SE (POAHY).
On August 22, VWAGY and Mercedes-Benz Group AG signed agreements with Canada to secure access to battery production raw materials such as nickel, cobalt and lithium. This agreement is expected to streamline the supply chain and ensure smooth operations in the US.
For the second quarter of fiscal year 2022, ending June 2022, VWAGY sales revenue grew 3.3% year over year to €69.54 billion ($67.03 billion). For the half-year ended June 2022, the company’s after-tax profit improved 25.8% year over year to €10.64 billion ($10.26 billion), while earnings per share rose 27.1% from a year ago to € 20.51.
Analysts expect VWAGY revenue for the third quarter ended September 2022 to grow 5.4% year over year to $69.51 billion. The consensus revenue estimate of $276.24 billion for the next year ending December 2023 points to a 3.7% year-over-year increase.
The stock is down 3.5% in the past month to close out its latest trading session at $18.33.
VWAGYs POWR ratings reflect these promising prospects. The company has an overall rating of A, which translates to Strong Buy in our proprietary rating system. The POWR Ratings rate stocks on 118 different factors, each with its own weighting.
VWAGY also has B grades for Value, Stability and Quality. Within the Car manufacturers industry, it ranks number 2 out of 64 stocks.
To see additional POWR ratings for VWAGY for growth, momentum and sentiment, click here.
Honda Motor Co., Ltd. (HMC)
Headquartered in Tokyo, Japan, HMC designs, manufactures and markets motorcycles, automobiles, electrical products and other products worldwide. The company operates through four segments: Motorcycle Business; car company; Financial services; and Life Creation and other companies.
On September 2, 2022, HMC announced the acquisition of 1.9% of its issued shares up to ¥100 billion ($693.4 million) to improve the efficiency of its capital structure. This promises to be a positive development for existing shareholders with potential for an EPS increase.
On August 29, HMC and LG Energy Solution announced an agreement to form a joint venture to manufacture US lithium-ion batteries to power Honda and Acura EV models for the North American market by the end of the year. 2025. Both companies plan a total of $4.4 billion, with HMC’s share of $1.7 billion.
On July 16, HMC announced the signing of a Memorandum of Understanding with Sony Group Corporation (SONY) to establish a joint venture for the development, sale and commercialization of high value-added electric vehicles (EVs) and related services.
HMC’s revenue increased 6.9% year-over-year to 3.83 trillion ($26.56 billion) in the first quarter of 2022 ended June 30, 2022. The company’s operating profit from Motorcycle Business stood at ¥97.80 billion ($678.15 million), an increase of 21.2% year over year.
Analysts expect HMC’s revenue for fiscal year 2023 (ending March 2023) to reach $118.39 billion, indicating a 343.2% year-over-year increase. The companies EPS for the current year is expected to grow 18.8% over the prior year to $3.26. Also, HMC has surpassed consensus revenue estimates in each of the next four quarters.
Shares of HMC are down 15.3% in the past month to close out the latest trading session at $22.81.
HMC’s stable outlook has earned it an overall POWR rating of B, which translates to a buy in our proprietary rating system. It has an A rating for Value and a B for Quality and Stability. In the same industry, it ranks number 7 out of 64 stocks.
In addition to what we discussed above, we also provided HMC figures for growth, momentum and sentiment. Get all HMC reviews here.
TSLA shares traded at $282.35 per share on Tuesday afternoon, up $6.34 (+2.30%). Year-to-date, the TSLA is down -19.85%, compared to a -22.68% rise in the benchmark S&P 500 index over the same period.
About the author: Santanu Roy
Fascinated by the traditional and evolving factors that influence investment decisions, Santanu decided to pursue a career as an investment analyst. Before moving to investment research, he was a process officer at Cognizant. With a master’s degree in business administration and a fundamental approach to analyzing companies, he aims to help private investors identify the best long-term investment opportunities.