Despite macroeconomic concerns, auto sales in the United States are expected to increase due to pent-up demand and technological advancements.
Therefore, it could be wise for investors to buy fundamentally sound auto stocks Honda Motor Co., Ltd. (HMC) and Stellantis N.V. (STLA) this month. However, I think Lucid Group, Inc. (LCID) could be best avoided, given its weak financials.
In August, the number of new vehicles sold in the U.S. was 1,341,169 units, up 16.2% from August 2022 and 2.0% from July 2023, when supply chains were still constraining output. As supply chains gradually stabilize, the increase in new car sales in August implies a solid rebound in the automotive sector.
According to Business Research Insights, the global automotive market will increase at a CAGR of 3% to $3.27 trillion by 2028. The shift toward electric and driverless vehicles is expected to propel the automobile sector forward in the next few years.
The auto industry is being transformed by AI, which is improving safety, efficiency, and the driving experience. Generative AI is becoming the driving factor for innovation.
This technology has the potential to significantly change the way automobiles are designed, manufactured, and utilized.
However, the issues in the US auto sector are varied and dynamic. One of the major challenges is increased competition from international automakers, particularly those from lower-cost countries. Also, the sector is dealing with shifting consumer preferences and demands for more environmentally friendly and electrified automobiles.
Let’s discuss the above-mentioned stocks in detail.
Stocks to Buy:
Honda Motor Co., Ltd. (HMC)
Headquartered in Tokyo, Japan, HMC develops, manufactures, and distributes motorcycles, automobiles, power products, and other products in Japan, North America, Europe, Asia, and internationally. It operates through four segments: Motorcycle Business; Automobile Business; Financial Services Business; and Life Creation and Other Businesses.
HMC’s forward EV/Sales of 0.70x is 38.3% lower than the industry average of 1.13x. Its forward Price/Sales of 0.46x is 47% lower than the industry average of 0.86x.
HMC’s trailing-12-month levered FCF margin of 8.42% is 65.3% higher than the industry average of 5.09%. Its trailing-12-month EBITDA margin of 13.12x is 19.2% higher than the industry average of 11.01x.
For the first quarter that ended June 30, 2023, HMC’s sales revenue increased 20.8% year-over-year to ¥4.62 trillion ($31.32 billion). The company’s operating profit increased 77.5% year-over-year to ¥394.45 billion ($2.67 billion). Its profit for the period increased 134.1% year-over-year to ¥382.95 billion ($2.60 billion). In addition, its EPS came in at ¥219.06, representing an increase of 151.1% year-over-year.
The consensus revenue estimate of $131.42 billion for the fiscal year ending March 2024 represents a 393.1% increase year-over-year. Its EPS is expected to grow 29.8% year-over-year to $3.71 for the same year. HMC’s shares have gained 47.6% over the past year to close the last trading session at $36.67.
HMC’s POWR Ratings reflect this promising outlook. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
HMC also has an A grade for Value, Stability, and Sentiment and a B for Growth and Quality. It is ranked first among 56 stocks in the Auto & Vehicle Manufacturers industry. Click here for the additional POWR Ratings for Momentum for HMC.
Stellantis N.V. (STLA)
Headquartered in Hoofddorp, the Netherlands, STLA designs, manufactures, distributes, and sells automobiles and light commercial vehicles, engines, transmission systems, metallurgical products, mobility services, and production systems worldwide. It offers its products under the Abarth, Alfa Romeo, Chrysler, DS, Dodge, Jeep, Fiat, Maserati, Ram, Opel, Lancia, Vauxhall, Peugeot, Comau, and Teksid brands.
STLA’s forward EV/EBITDA multiple of 1.06 is 88.7% lower than the industry average of 9.40. Its forward EV/EBIT multiple of 1.41% is 89.3% lower than the industry average of 13.12.
STLA’s trailing-12-month ROCE of 27.85% is 144.4% higher than the industry average of 11.39%, while its trailing-12-month ROTA of 9.95% is 155.5% higher than the industry average of 3.89%.
STLA’s net revenues for the six months ended June 30, 2023, increased 11.8% year-over-year to €98.37 billion ($105.52 billion). Its net profit increased 37.2% year-over-year to €10.92 billion ($11.71 billion). Its adjusted operating income rose 11% year-over-year to €14.13 billion ($15.16 billion). The company’s EPS came in at €3.45, representing an increase of 39.7% year-over-year.
Street expects STLA’s revenue to increase 6.7% year-over-year to $203.13 billion for the year ending December 2023. Its EPS is expected to grow 16.1% year-over-year to $6.41 for the same period. It has surpassed EPS estimates in all of the four trailing quarters. Shares of STLA have gained 42.1% over the past year to close the last trading session at $19.34.
STLA’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.
It is ranked #3 in the same industry. It has an A grade for Value and a B grade for Stability, Sentiment and Quality. To see additional STLA’s ratings for Growth and Momentum, click here.
Stock to Sell:
Lucid Group, Inc. (LCID)
Technology and automotive company LCID develops electric vehicle (EV) technologies. The company creates electric vehicles, EV powertrains, and battery systems.
LCID’s forward EV/Sales multiple of 12.19 is 976.4% higher than the 1.13 industry average. Also, its forward Price/Sales multiple is trading at 15.83, significantly higher than the industry average of 0.86.
LCID’s trailing-12-month ROCE of negative 52.67% is lower than the industry average of 11.39%, while its trailing-12-month negative ROTA of 27.05% is lower than the industry average of 3.89%.
LCID’s total cost and expenses came in at $988.56 million for the second quarter that ended June 30, 2023, up 7.7% year-over-year. Its loss from operations came in at $837.69 million, up 49.8% year-over-year. Moreover, the company’s net loss and loss per share came in at $764.23 million and $0.40, up 37.6% and 21.2% year-over-year, respectively.
Analysts expect LCID’s EPS to come in at negative $1.56 for the year ending December 2023. Over the past year, the stock has lost 65.5% to close the last trading session at $5.50.
LCID overall F rating equates to a Strong Sell in our POWR Ratings system. It also has an F grade for Value, Stability, Sentiment, and Quality and a D for Growth.
Beyond what is stated above, we’ve also rated LCID for Stability and Momentum. Get all LCID ratings here.
What To Do Next?
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HMC shares were trading at $36.58 per share on Wednesday morning, down $0.09 (-0.25%). Year-to-date, HMC has gained 62.03%, versus a 17.23% rise in the benchmark S&P 500 index during the same period.
About the Author: Rashmi Kumari
Rashmi is passionate about capital markets, wealth management, and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master's degree in commerce, she aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions.
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