The auto industry’s growth prospects look promising due to technological advancements, the rapid adoption of EVs, the rise in new and used car sales, the growing popularity of rented cars, rising disposable incomes, and favorable government incentives.
Amid this backdrop, fundamentally strong auto stocks Honda Motor Co., Ltd. (HMC), Gates Industrial Corporation plc (GTES), and Cars.com Inc. (CARS) could be solid portfolio additions during market turmoil. Before diving deeper into their fundamentals, let’s discuss what’s happening in the auto industry.
In the first quarter of 2024, new vehicle sales in the U.S. were nearly 3.80 million compared to a year ago. New vehicle sales grew 5.1% from January through March. Anticipation of interest rate cuts by central banks worldwide has led to the sector’s bright outlook. S&P Global said global light vehicle sales will increase by 2% to 3% over 2024 and 2025 to over 90 million.
The U.S. vehicle rental market is projected to grow at a 5.7% CAGR through 2029 due to sustainability concerns, increased awareness about lower emissions among people, the popularization of car rentals, and substantial cost savings. Moreover, the digitization of car rental services has contributed to its success as this has improved accessibility.
Additionally, the demand for used cars is expected to rise as prices stabilize this year as the availability of new vehicles improves, thus reducing the pressure on used car prices. Although there is sufficient inventory of new vehicles, prices remain high, which could help boost sales of used cars.
According to Cox Automotive, used car sales volume is expected to be 36.60 million this year, up from 35.90 million in 2023. Furthermore, auto parts are essential to ensure vehicles' smooth functioning and longevity.
With the rise in sales of new and used vehicles, the demand for auto parts is likely to rise. The auto parts market is projected to reach $1.10 trillion by the end of the decade, recording a CAGR of 6.8%.
With these favorable trends in mind, let's delve into the fundamentals of the three auto stocks.
Honda Motor Co., Ltd. (HMC)
Headquartered in Tokyo, Japan, HMC develops, manufactures, and distributes motorcycles, automobiles, power, and other products internationally. It operates through four segments: Motorcycle Business, Automobile Business, Financial Services Business, and Power Product and Other Businesses.
On April 25, 2024, HMC announced its plans to build a comprehensive EV value chain in Canada with an approximate investment of CAD$15 billion ($10.92 billion), partnering with POSCO Future M Co., Ltd., and Asahi Kasei Corporation to strengthen its EV supply system and readiness for increased demand in North America.
This initiative aims to strengthen HMC’s EV supply system and capability in preparation for increased EV demand in North America. It aligns with its goal for BEVs and FCEVs to represent 100% of vehicle sales by 2040.
On April 17, 2024, HMC announced the Ye Series of electric vehicles for China, including the Ye P7 and Ye S7 models set for sale later this year. The company plans to launch six EVs in China by 2027. These models are designed to focus on the "joy of driving" and will feature HMC’s updated "H" logo as part of its next-generation electric vehicle lineup.
HMC’s trailing-12-month EBITDA margin of 13.08% is 18.3% higher than the industry average of 11.06%. Its trailing-12-month net income margin and levered FCF margin of 4.84% and 7.29% are 4.7% and 28.6% higher than the industry averages of 4.62% and 5.67%, respectively.
HMC’s sales revenue for the fiscal third quarter that ended December 31, 2023, increased 21.4% from the year-ago value to ¥5.39 trillion ($34.69 billion). Its operating profit rose 35.4% year-over-year to ¥379.81 billion ($2.44 billion).
Moreover, its profit for the period attributable to owners of the parent stood at ¥253.31 billion ($1.63 billion), up 3.5% over the prior-year quarter. Also, its earnings per share attributable to owners of the parent grew 8.1% year-over-year to ¥52.04.
Analysts expect HMC’s revenue for the quarter that ended March 31, 2024, to increase 9.8% year-over-year to $35.76 billion. Its EPS for fiscal 2024 is expected to grow 7.5% year-over-year to $3.07. Over the past year, the stock has gained 26.5%, closing the last trading session at $33.88.
HMC’s POWR Ratings reflect its positive prospects. It has an overall A rating, equating to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
HMC has an A grade for Stability and a B for Growth, Value, and Quality. Within the Auto & Vehicle Manufacturers industry, it is ranked #3 out of 51 stocks. Click here for the additional POWR Ratings for HMC (Momentum and Sentiment).
Gates Industrial Corporation plc (GTES)
GTES manufactures and sells engineered power transmission and fluid power solutions worldwide. It operates in two segments: Power Transmission and Fluid Power.
On March 6, 2024, GTES, in collaboration with CoolIT Systems, announced its entry into the data center cooling market, leveraging technical expertise to develop efficient liquid cooling solutions for AI, HPC, and enterprise markets, supported by GTES’ strong manufacturing capabilities and supply chain.
On February 20, 2024, GTES announced the launch of the Clean Master Plus pressure wash hose, featuring advanced materials and wire reinforcement for high-pressure applications up to 6,000 psi, built for high-pressure applications in demanding industrial environments.
GTES’ trailing-12-month gross profit margin of 38.58% is 25% higher than the industry average of 30.86%. Likewise, its trailing-12-month EBIT margin and levered FCF margin of 13.99% and 10.95% are 37.8% and 66.6% higher than the industry averages of 10.15% and 6.57%, respectively.
For the fiscal first quarter that ended March 30, 2024, GTES’ net sales stood at $862.60 million. Its gross profit stood at $330 million, up 1.5% year-over-year. For the same quarter, its adjusted net income and net income per share increased 14.7% and 24% from the year-ago value to $83.50 million and $0.31, respectively.
Street expects GTES’ EPS for the quarter ending June 30, 2024, to increase marginally year-over-year to $0.36. Its revenue for the quarter ending September 30, 2024, is expected to grow marginally year-over-year to $880.87 million.
The company surpassed Street EPS estimates in three of the trailing four quarters. GTES’ stock has gained 47.3% over the past six months, closing the last trading session at $16.57.
GTES’ POWR Ratings reflect this promising outlook. It has an overall rating of B, equating to Buy in our proprietary rating system.
GTES has a B grade for Value and Quality. It is ranked #7 out of 61 stocks in the A-rated Auto Parts industry. Beyond what we stated above, we have also given GTES grades for Growth, Momentum, Stability, and Sentiment. Get all the GTES ratings here.
Cars.com Inc. (CARS)
CARS is an audience-driven technology company that provides solutions for the automotive industry in the U.S. Its Cars Commerce platform connects car shoppers with sellers. The company offers services that connect sellers with buyers, provide financing tools, and empower shoppers with digital resources for car buying decisions.
On April 2, 2024, CARS unveiled ‘Your Garage,’ a powerful tool designed to allow car owners to track the value of their vehicles so they can make more informed decisions on trade-ins and new purchases. This feature integrates market-driven data and valuation tools to empower consumers to manage their vehicles and navigate market fluctuations for optimal transactions.
On January 24, 2024, CARS announced that FordDirect selected AccuTrade, a CARS brand, as its preferred vehicle acquisition, trade, and appraisal solution for The Shop, a newly launched e-commerce platform for 3000+ Ford dealers and Lincoln retailers.
CARS’ trailing-12-month asset turnover ratio of 0.63x is 30.9% higher than the industry average of 0.48x. Its trailing-12-month Return on Common Equity and Return on Total Assets of 27.02% and 10.10% are 821.2% and 699.2% higher than the industry averages of 2.93% and 1.26%, respectively.
CARS’ total revenue for the fiscal fourth quarter that ended December 31, 2023, stood at $179.61 million, up 6.8% year-over-year. CARS’ net income stood at $8.35 million or $0.12 per share. Furthermore, its adjusted EBITDA rose 11.9% from the year-ago value to $55.40 million.
For the quarter that ended March 30, 2024, CARS’ revenue and EPS are expected to increase 7.4% and 13.2% year-over-year to $179.44 million and $0.49, respectively. It surpassed consensus revenue estimates in three of the trailing four quarters. The stock has declined 1% intraday to close the last trading session at $17.07.
CARS’ strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, equating to Buy in our proprietary rating system.
It has a B grade for Value, Stability, and Sentiment. It is ranked first out of 21 stocks in the Auto Dealers & Rentals industry. In total, we rate CARS on eight different levels. To see CARS’ Growth, Momentum, and Quality ratings, click here.
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HMC shares were trading at $33.90 per share on Thursday morning, up $0.02 (+0.06%). Year-to-date, HMC has gained 9.67%, versus a 9.56% rise in the benchmark S&P 500 index during the same period.
About the Author: Neha Panjwani
From her school days, Neha harbored a profound fascination for finance, a passion that steered her toward a career as an investment analyst following the completion of her bachelor's degree in commerce. Currently enrolled in the CFA program, Neha is dedicated to further enriching her comprehension of investment fundamentals. Neha's primary objective is to aid retail investors in discerning optimal investment opportunities by diligently evaluating crucial aspects of financial instruments, with a primary focus on stocks and ETFs. Her commitment lies in empowering individuals to make informed and strategic investment decisions in the dynamic world of finance.
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