The automobile industry has undergone a massive transformation over the past few years. The key drivers of this new era are Electric Vehicles (EVs) and CASE (connected, automated, shared, electrified) technologies.
However, multiple headwinds have exerted additional pressure on the margins of this industry over the past two years. With the shortage of microprocessors and raw materials, geopolitical conflicts, and increasing interest rates by central banks softening discretionary demand, the going has been tough.
Despite near-term uncertainties, the automotive industry is expected to enjoy sustained demand and ride the wave of increasing electrification. Furthermore, the CHIPS and Science Act should benefit automobile makers by strengthening manufacturing capabilities and supply chains.
According to a report by Mordor Intelligence, the North American automotive market is expected to grow at 6.6% CAGR to reach $970 billion by 2027.
Amid this backdrop, companies with strong fundamentals, Volkswagen AG (VWAGY) and Honda Motor Co. Ltd. (HMC), are worth the investment, whereas shares of struggling company Faraday Future Intelligent Electric Inc. (FFIE) are best avoided now.
Stocks to Buy:
Volkswagen AG (VWAGY)
VWAGY, the manufacturer and seller behind world-renowned brands such as Audi, Porsche, Bentley, and Lamborghini, is based in Wolfsburg, Germany. The company operates through four segments: Passenger cars and Light Commercial Vehicles; Commercial Vehicles; Power Engineering; and Financial Services. It sells its vehicles primarily in the Americas, Europe, and Asia-Pacific.
On November 1, VWAGY presented its new Green Finance Framework (GFF) to make investments in Green Debt Instruments issued by the company more attractive, transparent, and reliable for sustainability investors. This would strengthen the link between its decarbonization and financing strategy.
On October 28, VWAGY announced that it will invest $763.5 million between 2022 and 2025 at its complex in the central state of Puebla, Mexico, one of Volkswagen’s largest facilities, to build a new paint plant and start production of a new gasoline-powered car. The plant is expected to open early next year.
On October 13, VWAGY announced a new partnership between its software company CARIAD and Horizon Robotics, one of China's leading computing solutions providers for smart vehicles. The company will invest approximately € 2.4 billion ($2.5 billion) in cooperation with Horizon Robotics. The transaction is expected to be completed in the first half of 2023.
This partnership is expected to help VWAGY to speed up the customization of automated driving solutions for the Chinese market.
VWAGY’s sales revenue increased 24.2% year-over-year to €70.71 billion ($73.47 billion) for the fiscal third quarter. During the same period, the company’s operating result improved 64.5% year-over-year to €4.27 billion ($4.44 billion). For the nine months ended September 2022, its gross cash flow increased 15.1% from the year-ago value to €37.50 billion ($38.96 billion).
For the year ending December 2022, VWAGY’s revenue and EPS are expected to grow 5.8% and 91.2% year-over-year to $289.78 billion and $6.21, respectively. The stock has gained 12.3% over the past month to close the last trading session at $18.93.
VWAGY’s fundamental strength and stable prospects are reflected in its POWR Ratings. It has an overall rating of B, which translates to a Buy signal in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
VWAGY has an A grade for Value and a B for Growth, Stability, and Quality. It ranked #9 of 61 stocks in the Auto and Vehicle Manufacturers industry.
Additional ratings for VWAGY’s Momentum and Sentiment can be found here.
Honda Motor Co. Ltd. (HMC)
HMC manufactures, develops, and distributes automobiles, motorcycles, spare parts, and other products internationally. The company is headquartered in Tokyo, Japan, and operates through four segments: Motorcycle Business; Automobile Business; Financial Services Business; and Life Creation and Other Businesses.
On September 28, HMC announced the completion of the procedures to establish a joint venture with Sony Group Corporation (SONY) to develop, sell and commercialize high-value-added battery electric vehicles (EVs) and allied services.
On November 2, HMC announced the acquisition of 7.35 million shares worth ¥24 billion ($172.35 million) out of 1.9% of its issued shares worth a maximum amount of ¥100 billion ($718.11 million) to improve the efficiency of its capital structure. This promises to be a positive development for existing shareholders with the potential for an increase in EPS.
On July 14, the world’s largest IT infrastructure provider, Kyndril (KD), announced a multi-year agreement with HMC. This collaboration is intended to expand Kyndril’s work across U.S. plants and would help HMC to harness new data and bring more innovation to its consumers.
HMC’s sales revenue was ¥4.26 trillion ($30.56 billion) for the fiscal second quarter that ended September 30, up 25.3% year-over-year. During the same period, the company’s operating profit amounted to ¥231.24 billion ($1.66 billion), up 16.2% year-over-year, while the profit for the period attributable to owners of the parent company increased 13.6% year-over-year to ¥189.30 billion ($1.36 billion).
As a result, HMC’s EPS for the quarter also increased 14.8% year-over-year to ¥110.85.
Analysts expect HMC’s revenue to increase 10.6% year-over-year to $136.33 billion in the fiscal ending March 2024. In addition, its EPS is expected to increase 24.6% year-over-year to $3.02 during the same period.
The stock has gained 8.8% over the past month to close the last trading session at $24.43.
HMC’s stellar prospects have earned it an overall rating of A, which translates to a Strong Buy in our POWR Ratings system. It also has an A grade for Value and a B for Stability and Quality.
HMC is ranked #5 of 61 stocks in the Auto & Vehicle Manufacturers industry.
Click here for HMC’s ratings for Sentiment, Momentum, and Growth.
Stock to Avoid:
Faraday Future Intelligent Electric Inc. (FFIE)
FFIE is primarily engaged in designing and developing intelligent and connected electric vehicles and their related products with a vision of creating a shared, intelligent mobility ecosystem. The company’s technology portfolio includes its Variable Platform Architecture (VPA), propulsion system, and Internet, Autonomous Driving, and Intelligence (I.A.I.) system.
Last week, FFIE said in a filing late Monday that the timing of the first deliveries of its FF 91 electric vehicle is "uncertain" and "not expected to occur in 2022." Hence, delivery of its crossover, which was earlier scheduled for the end of the year, has been postponed.
On November 14, it announced that it had reached an agreement for a new standby equity line of credit ("ELOC") with an affiliate of Yorkville Advisors Global, LP ("Yorkville"). The facility has an initial commitment of $200 million which can be increased to up to $350 million at the company’s option.
The company would use the proceeds from this additional financing arrangement to progress toward the overdue launch of the FF 91, indicating the company's weak financials, a capital structure diluted further with additional equity.
For the nine months of the fiscal year ended September 30, FFIE’s total operating expenses increased 57.7% year-over-year to $367.07 million. As a result, the company reported a net loss of $398.17 million, or $1.15 per share. Its total assets stood at $540.68 million as of September 30, 2022, compared to $907.43 as of December 31, 2021. FFIE is yet to generate any revenue.
Analysts expect FFIE’s loss per share for the fiscal fourth quarter ending December 2022 to widen 288.9% to $0.35. The company is also expected to report a net loss during the next fiscal.
The stock has plummeted 35.5% over the past month and 94.7% year-to-date to close the last trading session at $0.32.
Due to its poor performance and bleak prospects, FFIE has an overall rating of F, which equates to a Strong Sell in our POWR Ratings system. Our proprietary rating system grades it F for Stability, Value, and Quality and a D for Sentiment.
FFIE is bottomed at #60 out of 64 stocks in the same industry.
Additional ratings for Growth and Momentum for FFIE are available here.
VWAGY shares were trading at $18.62 per share on Monday afternoon, down $0.31 (-1.64%). Year-to-date, VWAGY has declined -34.53%, versus a -15.65% rise in the benchmark S&P 500 index during the same period.
About the Author: Santanu Roy
Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.
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