The auto industry is well-positioned for immense resilience driven by supply chain recovery, easing inflation, increasing disposable income, and a growing acceptance of environment-friendly alternatives.
My assessment suggests that auto stocks Ferrari N.V. (RACE) and General Motors Company (GM) could be solid portfolio additions now. Conversely, given Nikola Corporation’s (NKLA) bleak fundamentals, it could be best avoided now.
Before delving deeper into the fundamentals of these stocks, let’s discuss potential diversification and swift growth trends redefining the automobile industry.
Last year, the automotive sector grappled with high inflation, persistent rate hikes, and a gridlocked supply chain. However, current data suggest that the industry has weathered these challenges and is poised for significant expansion in the upcoming years.
Due to pent-up demand and the easing of supply chains, U.S. auto sales in July 2023 surged 14.7% year-over-year to over 1.31 million units. The National Automobile Dealers Association (NADA) asserts that upgraded dealership inventories fueled this increase in sales and projects that sales for the latter half of 2023 will mirror the first. Furthermore, NADA has revised its initial 2023 total sales forecast to 15.2 million units.
According to Urban Science’s Automotive Franchise Activity Report (FAR), for the first half of 2023, 664,104 EV units were sold in the U.S. as of July 1, marking a 56% increase year-over-year. The sales trend is projected to continue its upward trajectory throughout 2023, with the industry expected to register total EV sales surpassing 1.3 million units.
Considering a 15.4 million units regular auto sales forecast in the U.S. this year, the projected EV figure would drive the national EV market share in the country to 9% in the first six months of 2023 from 7% in the year-ago period.
Future expansion of EV sales hinges on factors like consumers' increasing preference for eco-friendly transport options, price reductions, government funding, the rapid development of charging infrastructure, and appealing tax credits.
As these catalysts synthesize, they position the global automotive market to reach $6.07 trillion by 2030, growing at a CAGR of 6.9%.
Given this backdrop, fundamentally strong auto stocks RACE and GM could be strong candidates to trade now. However, it could be wise to avoid NKLA.
Stocks to Buy:
Ferrari N.V. (RACE)
Headquartered in Maranello, Italy, RACE designs, engineers, manufactures, and sells luxury performance sports cars worldwide. It also provides spare parts, engines, and after sales services, repair, maintenance, and restoration services for cars; and licenses its Ferrari brand to various producers and retailers of luxury and lifestyle goods.
Last month, RACE purchased, under the €200 million share buyback program announced on June 27, 2023. This is the third tranche of the multi-year share buyback program of approximately €2 billion, expected to be executed by 2026.
On May 5, RACE paid its shareholders an annual dividend of $2 per share, translating to a 0.63% yield on the current share price. Its four-year average dividend yield is 0.63%. The company’s dividend payouts have grown at a CAGR of 17.6% over the past three years and 18.1% over the past five years.
RACE’s trailing-12-month EBIT and net income margin of 25.61% and 19.46% are 252% and 365.9% higher than the industry averages of 7.28% and 4.18%, respectively. Its trailing-12-month ROCE, ROTC, and ROTA of 43.12%, 16.92%, and 13.51% are 317.9%, 182.6%, and 270.7% higher than the industry averages of 10.32%, 5.99%, and 3.65%, respectively.
RACE’s revenue grew at CAGRs of 18.2% and 10.1% over the past three and five years, respectively. Over the past three years, its EBITDA and EBIT grew at 24.2% and 27.3% CAGRs, respectively.
For the fiscal second quarter that ended June 30, 2023, RACE’s net revenues increased 14.2% year-over-year to €1.47 billion ($1.61 billion), while its adjusted EBIT grew 35.3% from the year-ago quarter to €437 million ($477.08 million).
The company’s adjusted net income and adjusted EPS stood at €334 million ($363.63 million) and €1.83, up 33.1% and 34.6% year-over-year, respectively. Also, its free cash flow for the quarter stood at €113 million ($123.36 million), up significantly from the year-ago quarter.
RACE’s revenue and EPS are expected to increase 29.5% and 38.1% year-over-year to $1.59 billion and $1.67 for the fiscal third quarter ending September 2023. Moreover, the company has topped the consensus EPS estimates in each of the trailing four quarters and revenue in three of the trailing four quarters, which is impressive.
RACE’s shares have gained 47.7% over the past year to close the last trading session at $313.34. Over the past six months, it gained 17.9%.
RACE’s POWR Ratings reflect a robust outlook. The stock has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It also has an A grade for Quality and a B for Growth and Stability. It is ranked #22 within the 55-stock Auto & Vehicle Manufacturers industry.
Click here for the additional POWR Ratings for Value, Momentum, and Sentiment for RACE.
General Motors Company (GM)
GM designs, builds, and sells trucks, crossovers, cars, and automobile parts; and provides software-enabled services and subscriptions worldwide. The company operates through GM North America; GM International; Cruise; and GM Financial segments.
On August 8, 2023, GM announced the expansion of its vehicle-to-home (V2H) bidirectional charging technology across its retail portfolio of Ultium-based electric vehicles by model year 2026. By integrating V2H across its entire Ultium-based portfolio, GM is making a groundbreaking technology available to more consumers worldwide.
On July 24, 2023, GM announced a quarterly dividend on the outstanding common stock of $0.09 per share, payable September 14, to all common shareholders. It pays a $0.36 per share dividend annually, translating to a 1.05% yield on the current share price. Its four-year average dividend yield is 1.62%.
GM’s trailing-12-month net income margin of 6.05%, 44.8% higher than the industry average of 4.18%. Its trailing-12-month ROCE and ROTA of 15% and 3.72% are 45.4% and 2.1% higher than the industry averages of 10.32% and 3.65%, respectively.
GM’s revenue grew at CAGRs of 13.6% and 3.3% over the past three and five years, respectively. Its EBITDA and EBIT grew at 24.4% and 46.4% CAGRs, respectively, over the past three years.
GM’s total revenues for the fiscal second quarter that ended June 30, 2023, increased 25.1% year-over-year to $44.75 billion, while its adjusted EBIT rose 38% year-over-year to $3.23 billion.
Its net income attributable to stockholders rose 51.7% year-over-year to $2.57 billion, while its adjusted EPS came in at $1.91, representing a 67.5% increase year-over-year. GM’s adjusted automotive free cash flow grew 294.3% year-over-year to $5.55 billion.
For the fiscal third quarter ending September 2023, GM’s revenue is expected to increase 4.4% year-over-year to $43.72 billion, while its EPS is expected to come at $1.90. It surpassed the consensus EPS estimates in each of the trailing four quarters.
Over the past three months, the stock has gained 4.1% to close the last trading session at $32.82.
GM’s positive outlook is reflected in its POWR Ratings. It has an overall rating of B, equating to a Buy in our proprietary rating system.
It has an A grade for Value. It is ranked #24 in the Auto & Vehicle Manufacturers industry.
To see GM’s ratings for Growth, Momentum, Stability, Sentiment, and Quality, click here.
Stock to Avoid:
Nikola Corporation (NKLA)
NKLA operates as a technology innovator and integrator that works to develop energy and transportation solutions. It operates through two business units, Truck and Energy.
NKLA’s forward EV/Sales and Price/Sales of 13.89x and 12.83x are 669.1% and 826.2% higher than the industry averages of 1.74x and 1.39x, respectively. Its forward Price/Book multiple of 3.22 is 29.7% higher than the industry average of 2.48.
NKLA’s trailing-12-month gross profit margin of negative 222.12% is compared with the industry average of 30.14%. Moreover, its trailing-12-month ROCE, ROTC, and ROTA of negative 132.55%, 49.49%, and 74.31% are lower than the industry averages of 13.81%, 6.81%, and 5.08%, respectively. Also, its tangible book value declined at a CAGR of 19.3%.
NKLA’s total revenues for the fiscal second quarter that ended June 30, 2023, declined 15.3% year-over-year to $15.36 million, while its gross loss came at $27.63 million. Its loss from operations for the quarter stood at $168.63 million.
Moreover, the company’s net loss grew 25.9% year-over-year to $217.83 million, while its net loss per share stood at $0.31. For the six months that ended June 30, 2023, its cash and cash equivalents came in at $295.36 million, down 44.2% year-over-year.
Street expects NKLA’s revenue to decline 5.4% year-over-year to $22.93 million for the fiscal third quarter ending September 2023, while its EPS is expected to remain negative at $0.19. Moreover, NKLA failed to surpass consensus EPS estimates in three of the trailing four quarters, which is disappointing.
Over the past year, the stock has lost 71.9% to close the last trading session at $1.94. The stock has declined 22.7% over the past six months.
NKLA’s POWR Ratings reflect its poor prospects. It has an overall F grade, equating to a Strong Sell in our POWR Ratings system.
It has an F for Value, Stability, and Quality. It is ranked #47 within the same industry.
Beyond what we have just highlighted, one can see NKLA’s other ratings (Growth, Momentum, and Sentiment) here.
What To Do Next?
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RACE shares fell $1.64 (-0.52%) in premarket trading Thursday. Year-to-date, RACE has gained 45.50%, versus a 16.26% rise in the benchmark S&P 500 index during the same period.
About the Author: Sristi Suman Jayaswal
The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.
General Motors Co. (GM), Ferrari N.V. (RACE), and Nikola (NKLA): Buy or Sell? StockNews.com
