Over the past year, the auto industry has witnessed a robust recovery. Strong customer demand, rapid electric vehicle (EV) adoption, favorable government incentives, and improved global supply chains are driving its current growth. At the same time, anticipated interest rate cuts by the central banks this year are expected to drive the industry’s growth further.
Amid this backdrop, it could be wise to consider buying fundamentally strong auto stocks AB Volvo (publ) (VLVLY), Holley Inc. (HLLY), and Motorcar Parts of America, Inc. (MPAA).
Before delving deeper into their fundamentals, let’s discuss what’s happening in the auto industry.
Despite facing challenges like rising vehicle prices and sticky inflation, the auto industry is likely to benefit from manufacturer promotions, the adoption of electric vehicles, rising disposable incomes, increasing DIY initiatives, and technological advancements.
According to Cox Automotive, the rate of new vehicle sales in February will be higher than in January, almost reaching 15.4 million. Compared to last February, sales are expected to go up by 0.5 million. Also, February's new vehicle sales volume is estimated to rise by 6.3% over last year, reaching 1.22 million units.
The growing popularity of electric vehicles positions the auto industry for expansion, supported by environmental concerns, expanding charging infrastructure, price reductions, and government incentives. BloombergNEF's electric vehicle outlook projects 730 million passenger EVs on the road by 2040, comprising 44% of global passenger vehicle sales by 2030.
It is noteworthy that the auto industry is expected to benefit from interest rate cuts this year, as it will make borrowing cheaper. Global automotive sales are projected to grow from 91 million units last year to 96 million units this year, growing at a rate of between 5% and 7% year-over-year. Also, online car sales are expected to increase significantly, reaching between 7.10 million and 7.30 million units in 2024.
As vehicle prices continue to remain elevated, the affordability of new vehicles could remain challenging, forcing potential new car buyers to keep their existing cars longer. This is expected to boost the demand for auto parts as older vehicles need more maintenance and spare parts to keep them running.
Moreover, the use of advanced electronic components, infotainment systems, connectivity features, enhanced safety features, high-performance brake systems, electronic stability control systems, and the rise of automotive DIY is boosting the demand for advanced auto parts. The global auto parts market is expected to grow at a 6.8% CAGR until 2030.
Considering these conducive trends, let’s analyze the fundamental aspects of the auto stocks mentioned above.
AB Volvo (publ) (VLVLY)
Headquartered in Gothenburg, Sweden, VLVLY and its subsidiaries manufacture and sell trucks, buses, construction equipment, and marine and industrial engines internationally. The company offers trucks for long-haulage, construction, mining, and distribution purposes, city and intercity buses, coaches, and bus chassis, as well as associated transport systems.
In terms of the trailing-12-month net income margin, VLVLY’s 9.01% is 51.5% higher than the 5.95% industry average. Likewise, its 29.27% trailing-12-month Return on Common Equity is 145.5% higher than the 11.92% industry average. Additionally, its 4.23% trailing-12-month Capex/Sales is 40.1% higher than the 3.02% industry average.
For the fourth quarter, which ended on December 31, 2023, VLVLY’s net sales increased 10.3% year-over-year to SEK 148.12 billion ($14.34 billion). The company’s adjusted operating income stood at SEK 18.38 billion ($1.78 billion), reflecting a 51% increase year-over-year.
Moreover, its income for the period and EPS rose 80.7% and 81.9%, respectively, over the previous year’s quarter to SEK 12.09 billion ($1.17 billion) and SEK 5.93.
Street expects VLVLY’s EPS and revenue for fiscal 2025 to increase 10.6% and 5.2% year-over-year to $2.27 and $50.78 billion, respectively. Over the past year, the stock has gained 40.7% to close the last trading session at $27.16.
VLVLY’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #12 out of 52 stocks in the Auto & Vehicle Manufacturers industry. It has an A grade for Stability and a B for Quality. To see VLVLY’s Growth, Value, Momentum, and Sentiment ratings, click here.
Holley Inc. (HLLY)
HLLY operates as a designer, marketer, and manufacturer of automotive aftermarket products for car and truck enthusiasts. Its products span various automotive platforms and sell across multiple channels.
In terms of the trailing-12-month EBIT margin, HLLY’s 10.64% is 42.7% higher than the 7.46% industry average. Likewise, its 13.33% trailing-12-month levered FCF margin is 143.4% higher than the 5.48% industry average. Also, its 14.45% trailing-12-month EBITDA margin is 34.6% higher than the 10.74% industry average.
HLLY’s net sales for the third quarter ended October 1, 2023, increased 1.1% year-over-year to $156.53 million. The company’s operating income rose 531% year-over-year to $19.32 million.
For the same quarter, its adjusted net income came in at $3.52 million, compared to an adjusted net loss of $4.13 million in the year-ago quarter. Also, its adjusted EBITDA rose 81.5% over the prior-year quarter to $29.71 million.
For the quarter ending March 31, 2024, HLLY’s EPS is expected to increase 108.7% year-over-year to $0.11. Its revenue for the same quarter is expected to increase 4.3% year-over-year to $179.59 million. It surpassed the consensus EPS estimates in three of the trailing four quarters. Over the past year, the stock has gained 109.8% to close the last trading session at $4.51.
HLLY’s solid prospects are reflected in its POWR Ratings. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
It has an A grade for Growth and a B for Sentiment and Quality. Within the A-rated Auto Parts industry, it is ranked #21 out of 62 stocks. Beyond the grades mentioned above, we have also rated HLLY for Value, Momentum, and Stability. Get all ratings here.
Motorcar Parts of America, Inc. (MPAA)
MPAA manufactures, remanufactures, and distributes heavy-duty truck, industrial, marine, and agricultural application replacement parts in the United States. The company offers rotating electrical products, wheel hub assemblies and bearings, and brake-related products.
On February 12, 2024, MPAA announced the introduction of over 20 new part numbers for its Quality-Built brake pad and rotor program, expanding coverage to seven million additional vehicles. The new parts are available through QB, Quality-Built, and Quality-Built Black Series brands, reflecting MPAA's commitment to meet demand in the professional installer market.
In terms of the trailing-12-month levered FCF margin, MPAA’s 6.05% is 10.5% higher than the 5.48% industry average.
MPAA’s net sales for the third quarter that ended December 31, 2023, increased 13.2% year-over-year to $171.86 million. The company’s gross profit rose 43.1% year-over-year to $30.04 million. Moreover, its operating income rose 192.5% over the prior-year quarter to $9.52 million.
Analysts expect MPAA’s revenue for the quarter ending March 31, 2024, to increase 2% year-over-year to $198.60 million, and its EPS for the quarter ending June 30, 2024, is expected to increase 72.8% year-over-year to $0.07. Over the past nine months, the stock has gained 40.1% to close the last trading session at $9.22.
MPAA’s POWR Ratings reflect its positive outlook. It has an overall rating of B, equating to a Buy in our proprietary rating system.
Within the same industry, it is ranked #22. It has an A grade for Growth and a B for Value. Click here to see MPAA’s Momentum, Stability, Sentiment, and Quality ratings.
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VLVLY shares were trading at $27.11 per share on Monday morning, down $0.05 (-0.18%). Year-to-date, VLVLY has gained 4.49%, versus a 6.92% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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