The automotive industry is gearing up for massive growth in upcoming years, driven by increased digital integration and rapid adoption of clean and sustainable technologies. Demand for electric automobiles is on the rise as a result.
According to Motor Intelligence data, Americans bought about 724,000 electric vehicles (EVs) in the first eleven months of 2022, while 326,000 EVs were purchased in 2019.
Increasing demand for electric automobiles and strict government safety regulations imposed on the industry are boosting its growth. The global EV market is projected to reach $34.4 billion by 2031, growing at a CAGR of 20.3%.
However, supply chain disruptions, chip shortages, rising interest rates, and excessive inflation impede the manufacturing and sales of automobiles. In addition to input costs, semiconductor, steel, and aluminum prices are also rising, making it costlier for suppliers to create parts, thus reducing margin growth.
In order to capitalize on the industry's promising growth prospects, it could be wise to add fundamentally sound auto stocks General Motors Company (GM) and Honda Motor Co., Ltd. (HMC) to your portfolio. However, fundamentally weak and beaten-down stocks Li Auto Inc. (LI) and NIO Inc. (NIO) could be best avoided now, given the near-term macroeconomic headwinds.
Stocks to Buy:
General Motors Company (GM)
GM manufactures and distributes cars, trucks, crossovers, and auto parts and accessories worldwide. The business operates through four segments, GM North America; GM International; Cruise; and GM Financial. It primarily sells cars under Buick, Cadillac, Chevrolet, GMC, Holden, Baojun, and Wuling names.
On November 17, GM and Vale Canada Limited, a division of Vale S.A. (VALE), announced the signing of a term sheet for the long-term supply of battery-grade nickel sulfate from Vale's projected factory in Bécancour, Quebec, Canada. By entering this deal, GM is guaranteed a supply of nickel sulfate from a U.S. free-trade partner to meet its rapidly expanding EV production demands in North America.
This new arrangement with Vale strengthens GM's leadership in developing a safe and sustainable North American EV supply chain.
For the fiscal 2022 third quarter ended September 30, 2022, GM’s revenue increased 56.4% year-over-year to $41.89 billion. The company’s adjusted EBIT grew 46.7% from the year-ago value to $4.29 billion.
Also, its net income attributable to stockholders came in at $3.31 billion, a 36.6% increase from the prior year’s quarter, and its adjusted EPS stood at $2.25, up 48% year-over-year.
GM pays a $0.18 per share dividend annually, which translates to a 0.51% yield on the current price. Its four-year average dividend yield is 2.15%.
The consensus revenue estimate of $154.22 billion for the current fiscal year (ending December 2022) indicates a 21.4% year-over-year improvement. Likewise, the consensus EPS estimate of $7.15 for the same year reflects a rise of 1.1% from the prior year. Moreover, the company has surpassed its earnings in three of the four trailing quarters.
The stock has gained 7.8% over the past six months to close the last trading session at $35.20.
GM’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
The stock has an A grade for Growth and a B for Value and Sentiment. Within the Auto & Vehicle Manufacturers industry, it is ranked #18 of 61 stocks.
Beyond what we stated above, we also have GM’s ratings for Quality, Stability, and Momentum. Get all GM ratings here.
Honda Motor Co., Ltd. (HMC)
HMC is a multinational manufacturer and distributor of motorbikes, cars, power equipment, and other goods, with its headquarters in Tokyo, Japan. It operates through four segments, Motorcycle Business; Automobile Business; Financial Services Business; and Life Creation and Other Businesses. The company also offers after-sale services and sells spare parts.
On December 8, HMC's Honda Motor (China) Investment Co., Ltd signed a battery-for-electric-vehicle deal with Contemporary Amperex Technology Co Limited (CATL). As per the contract, Honda would buy 123 GWh of batteries from CATL for use in China's pure electric vehicles between 2024 and 2030. The battery supply contract will guarantee Honda a steady, long-term supply of batteries.
On October 11, HMC and LG Energy Solution (LGES) announced plans to build a new joint venture battery plant in Fayette County, Ohio, where they intend to invest $3.5 billion and create 2,200 jobs.
The firm aims to invest in a workforce that will provide the power source for future Honda and Acura electric vehicles. It has set a goal of having battery-electric and fuel-cell electric vehicles account for 100% of its vehicle sales by 2040.
For the fiscal 2023 second quarter ended September 30, 2022, HMC’s sales revenue increased 25% year-over-year to ¥4.26 trillion ($32.29 billion), while its operating profit grew 16.2% from the year-ago value to ¥231.24 billion ($1.75 million). The company’s profit for the period was ¥205.16 billion ($1.56 million), up 20.1% year-over-year, while its EPS stood at ¥110.85, a 14.8% rise from the year-ago value.
The company pays a $0.94 per share dividend annually, which translates to a 4% yield on the current price. HMC’s dividend payouts have grown at a 7.1% CAGR over the past three years, and its four-year average dividend yield is 3.38%.
Analysts expect HMC’s revenue for the fiscal 2023 third quarter (ending December 2022) to come in at $33.48 billion, indicating a 4.9% year-over-year improvement. Moreover, the company’s revenue for the current fiscal year (ending March 2023) is expected to increase 376% from the previous year to $127.13 billion.
The stock slumped marginally intra-day to close the last trading session at $23.45.
HMC’s POWR Ratings reflect its strong outlook. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.
The stock has an A grade for Value and a B for Stability, Quality, and Sentiment. Within the Auto & Vehicle Manufacturers industry, it is ranked #2 of 61 stocks. To see additional POWR ratings for Growth and Momentum for HMC, click here.
Stocks to Avoid:
Li Auto Inc. (LI)
LI, headquartered in Beijing, China, designs and sells new energy cars in the People's Republic of China. The company's primary products are sport utility vehicles (SUVs) sold under the Li ONE brand. Furthermore, it offers services and sells peripheral goods, such as extended lifetime warranties, Internet connection services for vehicles, and charging stations.
For the third quarter of fiscal 2022 ended September 30, 2022, LI’s gross profit declined 34.8% year-over-year to RMB 1.18 billion ($166.16 million), while its loss from operations widened 2,077.6% to RMB 2.13 billion ($299.39 million) from the year-ago value.
In addition, LI’s net loss worsened by 7,554.4% year-over-year to RMB 1.65 billion ($231.35 million). The company reported a loss of $0.12 per share, widening 8,300% year-over-year.
Analysts expect LI’s EPS to decline 53.7% year-over-year to $0.05 for the fourth quarter (ending December 2022). Moreover, the company is expected to report a loss of $0.08 per share for the current fiscal year. The stock has slumped 4.5% over the past five days and 43.7% over the past six months to close the last trading session at $20.12.
LI’s poor prospects are also apparent in its POWR Ratings. The stock has an overall rating of D, which equates to a Sell in our proprietary rating system.
The stock has an F grade for Stability and a D for Growth, Value, and Sentiment. Within the same industry, it is ranked #43 of 61 stocks.
Beyond what we stated above, we also have LI ratings for Quality and Momentum. Get all LI ratings here.
NIO Inc. (NIO)
Headquartered in Shanghai, China, NIO develops and sells smart electric vehicles in China. It also offers smart electric sedans with five-, six-, and seven-seater SUVs. The business also produces e-powertrains, after-sales administration activities, and provides energy and service packages to its customers.
On December 20, NIO reported that hackers had broken into its computer systems, gained access to users and vehicle sales information, and sent the electric car manufacturer an email demanding $2.25 million in bitcoin while claiming to have the company's internal data. This could compel NIO to incur high costs to upgrade its data security measures.
For the third quarter of fiscal 2022 ended September 30, NIO’s gross profit declined 12.9% from the year-ago value to RMB 1.74 billion ($243.92 million). Its total operating expenses increased 87.8% year-over-year to RMB 5.61 billion ($787.99 million).
In addition, the company’s adjusted loss from operations came in at RMB 3.26 billion ($467.60 million), a widening of 348.6% year-over-year. Its adjusted net loss worsened by 514.2% from the previous year’s quarter to RMB 3.50 billion ($502.03 million).
Analysts expect NIO to report a loss per share of $0.26 for the fiscal 2022 fourth quarter (ending December 2022). Likewise, for the current fiscal year, the company is expected to incur a loss per share of $1.03.
The stock has plunged 51.1% over the past six months and 66.9% year-to-date to close the last trading session at $11.09.
NIO’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.
The stock has an F grade for Stability. Within the same industry, it is ranked #53 of 61 stocks. Click here to see the additional rating of NIO for Growth, Value, Sentiment, and Momentum.
GM shares were trading at $35.95 per share on Wednesday afternoon, up $0.75 (+2.13%). Year-to-date, GM has declined -38.41%, versus a -17.44% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
2 Auto Stocks to Buy in December and 2 to Avoid StockNews.com
