Rising rates and a slowing economy have been taking a toll on the auto industry. However, despite decreasing demand, profit for the auto industry expanded amid rising prices. Domestic manufacturers of cars and car parts saw a profit of $32 billion through the third quarter of 2022, their largest gain since 2016.
Car prices might remain high for an extended time amid lingering logistic disruptions.
In addition, demand for electric vehicles (EVs) is expected to drive robust growth in the auto sector. According to Cox, EV sales increased by 66% to more than 808,000 units in 2022 in the United States. Furthermore, the global automotive market is expected to grow at a CAGR of 3% until 2028.
Given this backdrop, investors might buy quality auto stocks General Motors Company (GM) and Honda Motor Co., Ltd. (HMC). However, fundamentally weak Mullen Automotive, Inc. (MULN) and Faraday Future Intelligent Electric Inc. (FFIE) might be best avoided.
Stocks to Buy:
General Motors Company (GM)
GM designs, builds, and sells trucks, crossovers, cars, and automobile parts; and provide software-enabled services and subscriptions worldwide. Its segments are GM North America; GM International; Cruise; and GM Financial segments.
GM’s forward EV/Sales of 0.93x is 25.1% lower than the industry average of 1.25x. Its forward Price/Sales of 0.36x is 64.3% lower than the industry average of 1.00x.
GM’s trailing-12-month EBITDA and net income margins of 11.37% and 6.34% are 2.5% and 23.3% higher than the industry averages of 11.09% and 5.14%.
GM’s revenue came in at $43.11 billion for the period that ended December 31, 2022, up 28.4% year-over-year. Its adjusted EBIT increased 33.8% year-over-year to $3.80 billion, while its adjusted EPS came in at $2.12, representing an increase of 57% year-over-year.
For the current fiscal year 2023, analysts expect GM’s revenue to increase marginally year-over-year to $159.18 billion. Its EPS is expected to increase by 15.7% per annum for the next five years. It surpassed EPS estimates in three of four trailing quarters. Over the past month, the stock has gained 21.6% to close the last trading session at $41.13.
GM’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, which equates to a Buy in our POWR Rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
Also, the stock has a B grade for Growth, Value, and Sentiment. Within the Auto & Vehicle Manufacturers industry, it is ranked #21 out of 62 stocks. Click here for the additional POWR Ratings for Momentum, Stability, and Quality for GM.
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.
In terms of forward EV/Sales, HMC’s 0.56x is 55% lower than the industry average of 1.25x, while its forward Price/Sales of 0.31x is 69.1% lower than the industry average of 1.00x.
The stock’s trailing-12-month EBITDA margin of 13.94% is 25.7% higher than the industry average of 11.09%. Its trailing-12-month levered FCF margin of 8.63% is 536.7% higher than the industry average of 1.36%.
HMC’s sales revenue came in at ¥4.26 trillion ($31 billion) for the quarter that ended September 30, 2022, up 25% year-over-year. Its operating profit increased 16.2% year-over-year to ¥231.20 billion ($1.69 billion). Moreover, its profit came in at ¥189.20 billion ($1.39 billion), representing a 13.6% year-over-year rise.
Street expects HMC’s revenue to grow 396.9% year-over-year to $132.72 billion for the fiscal year ending March 2023. Its EPS is expected to increase by 13.2% per annum for the next five years. Over the past month, the stock has gained 5.7% to close the last trading session at $24.60.
It’s no surprise that HMC has an overall A rating, which equates to a Strong Buy in our proprietary POWR Rating system. In addition, it has an A grade for Value and a B for Stability and Quality.
HMC is ranked #8 in the same industry. To see the additional POWR Ratings for HMC, click here (Growth, Momentum, and Sentiment).
Stocks to Avoid:
Mullen Automotive, Inc. (MULN)
MULN manufactures and distributes electric vehicles. Its products include passenger electric vehicles and commercial vehicles, and it provides solid-state polymer battery technology.
MULN’s trailing-12-month Price/Book of 5.79x is 142.8% higher than the industry average of 2.39x.
Its trailing-12-month ROTC and ROTA of negative 80.31% and 244.40% are significantly lower than the industry averages of 6.38% and 4.42%.
MULN’s loss from operations came in at $96.99 million for the period ended September 30, 2022, up 332.9% year-over-year. Its research and development expenses increased 619.5% year-over-year to $21.66 million.
Over the past year, the stock has lost 85.1% to close the last trading session at $0.41.
MULN’s POWR Ratings reflect its poor prospects. It has an overall rating of grade F, which represents a Strong Sell in our POWR Rating system. The stock has an F grade for Value and Stability and a D for Sentiment and Quality.
MULN is ranked #57 in the same industry. Get the additional POWR Ratings for MULN (Growth and Momentum) here.
Faraday Future Intelligent Electric Inc. (FFIE)
FFIE designs, develops, manufactures, engineers, sells, and distributes electric vehicles and related products in the United States and internationally.
FFIE’s trailing-12-month ROTC and ROTA of negative 47.34% and 89.23% are lower than the industry averages of 6.38% and 4.42%.
FFIE’s cash came in at $31.77 million for the period that ended September 30, 2022, compared to $505.09 million for the period that ended December 31, 2021. Its total current assets came in at $102.22 million compared to $607.26 million for the same period.
Analysts expect FFIE’s EPS to remain negative in 2023. Over the past year, the stock has lost 73.7% to close the last trading session at $1.08.
FFIE’s POWR Ratings are consistent with this bleak outlook. The stock has an overall F rating, equating to a Strong Sell in our proprietary rating system. In addition, the stock has an F grade for Stability and Quality and a D for Value. It is ranked #47 in the same industry.
We also have graded FFIE for Growth, Momentum, and Sentiment. Click here to access all the FFIE ratings.
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GM shares fell $0.28 (-0.68%) in premarket trading Monday. Year-to-date, GM has gained 22.27%, versus a 7.82% rise in the benchmark S&P 500 index during the same period.
About the Author: Riddhima Chakraborty
Riddhima is a financial journalist with a passion for analyzing financial instruments. With a master's degree in economics, she helps investors make informed investment decisions through her insightful commentaries.
2 Auto Stocks to Buy in 2023 and 2 to Avoid StockNews.com
