The automotive industry performed well in the first quarter, thanks to the easing supply chain issues, growing demand for the Electric Vehicle (EV) segment, and rebuilding inventory levels. Moreover, the OEM segment, including suppliers and investors, forecast a strong demand to continue beyond 2030.
Given the solid comeback, it could be wise to scoop up the shares of Volkswagen AG (VWAGY) and Suzuki Motor Corporation (SZKMY), given their solid fundamentals and high profitability. As investors weigh the risks of sluggish demand due to prevailing macroeconomic headwinds, it could be wise to avoid Rivian Automotive, Inc. (RIVN), which seems to be struggling.
In line with the steep decline in growth last year, the first quarter of 2023 has brought a surprising turnaround for the auto industry. As per the insights provided by ABI Research, most carmakers are moving back to profitability as the industry is reportedly not facing high inflation, rising prices of vehicles, supply chains, and semiconductor shortages. The industry is poised to bounce back to a position of selling more than 90 million vehicles by 2025.
The U.S. new-vehicle sales volume reached 7.69 million units in the first half of 2023, indicating an increase of 12.3% year over year. After a stronger-than-expected first half, punctuated by a notable improvement in fleet sales, the firm increased its full-year sales forecast to 15 million units.
Since technology is transitioning across the industry, most auto companies have been proactive in upgrading their approach to the adoption of EVs. Moreover, the global EV market is projected to reach around $1.72 trillion by 2032, growing at a CAGR of 23.1%.
Fuel prices fell moderately, and gas prices moved upward, leading to a high demand for EVs. Further, it also made headway for trends like the use of robotaxi services, driverless cars, and ongoing localization of components. The global automotive market is expected to expand at a CAGR of 2.8% to reach $2.46 trillion by 2028.
Despite the solid growth projections for the auto industry, it is crucial to keep in mind that the industry is vulnerable to economic fluctuations affecting the consumer demand for vehicles. Moreover, the shortage of public fast-charging infrastructure, the rising cost of batteries due to key material shortages, and uncertainty over government subsidies could also hinder the growth of EVs.
To that end, let’s evaluate the fundamentals of the featured stocks in detail:
Stocks to Buy:
Volkswagen AG (VWAGY)
Based in Wolfsburg, Germany, VWAGY is engaged in manufacturing and selling automobiles. The company operates through four segments: Passenger Cars and Light Commercial Vehicles; Commercial Vehicles; Power Engineering, and Financial Services.
On July 12, VWAGY and its brand, Elli, launched electricity trading on EPEX Spot, Europe's largest power exchange. The project includes battery storage and a digital platform for battery and electricity trading. Elli aims to build a smart energy portfolio, and both companies intend to contribute to the energy transition by leveraging electric car and battery storage capacities.
On June 21, the company launched performance programs across all brands. It involves a paradigm shift by emphasizing sustainable value creation over volume growth. This new launch should help VWAGY maintain and improve its cash flows and profitability position.
In terms of forward EV/Sales and Price/Sales, VWAGY is trading at 0.79x and 0.21x, which are 33.8% and 77.3% lower than the industry averages of 1.20x and 0.90x. Also, its forward EV/EBITDA multiple of 6.15 compares with the industry average of 9.81.
In the second quarter that ended June 30, 2023, VWAGY’s sales revenue increased 15.2% year-over-year to €80.06 billion ($88.49 billion). Its operating result improved 24.7% from the year-ago value to €5.60 billion ($6.19 billion), while its earnings after tax amounted to €3.79 billion ($4.19 billion). Also, its vehicle sales units increased 15.5% year-over-year to 2.32 million.
The consensus EPS estimate of $6.41 for the fiscal year 2023 (ending December 31) represents a 101.5% improvement year-over-year. The consensus revenue estimate of $335.69 billion for the current year indicates an 11.9% increase from the prior-year period. The company has an excellent revenue surprise history, surpassing the consensus revenue estimates in three of the trailing four quarters.
The stock’s trailing-12-month levered FCF margin and CAPEX/Sales of 5.10% and 4.68% are 29.9% and 44.3% higher than the 3.92% and 3.24% industry averages, respectively. Likewise, its net income margin of 4.47% is 7% higher than the industry average of 4.18%.
VWAGY’s shares have gained 6.5% over the past nine months to close the last trading session at $16.03.
VWAGY’s solid fundamentals are apparent in its POWR Ratings. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Value and B for Growth, Stability, and Quality. Among the 55 stocks in the Auto & Vehicle Manufacturers industry, it is ranked #10.
In addition to the POWR Ratings I’ve just highlighted, you can see VWAGY’s ratings for Momentum and Sentiment here.
Suzuki Motor Corporation (SZKMY)
Headquartered in Hamamatsu, Japan, SZKMY is engaged in manufacturing and marketing automobiles, motorcycles, and marine products in Japan, the rest of Asia, Europe, North America, and internationally. It offers mini-vehicles, sub-compact vehicles, standard-sized vehicles, outboard motors, motorized wheelchairs, and electro-senior vehicles.
In terms of forward EV/Sales, SZKMY is trading at 0.58x, 51.5% lower than the industry average of 1.20x. Likewise, its forward EV/EBITDA and Price/Sales multiples of 4.85 and 0.54 are 50.6% and 39.9% lower than the industry averages of 9.81x and 0.90x, respectively.
For the fiscal year 2022 that ended on March 31, 2023, SZKMY’s net sales increased 30.1% year-over-year to ¥4.64 trillion ($33.15 billion), while its operating profit grew 83.1% from the year-ago value to ¥350.55 billion ($2.50 billion). Profit attributable to owners of the parent amounted to ¥221.11 billion ($1.58 billion) and ¥455.19 per share, up 37.9% year-over-year.
The company’s net cash provided by operating activities increased 29.5% from the prior year to ¥286.63 billion ($2.05 billion), while its cash and cash equivalents came in at ¥882.15 billion ($6.30 billion), representing a 2.8% year-over-year improvement.
SZKMY’s trailing-12-month ROTA and ROCE of 4.83% and 11.18% are 32.5% and 13.6% higher than the industry averages of 3.65% and 9.84%, respectively. Also, its trailing-12-month net income margin of 4.76% is 14% higher than the industry average of 4.18%.
For the fiscal first quarter (ended June 30, 2023), SZKMY’s revenue is expected to increase 4.4% year-over-year to $8.22 billion. It is expected to reach $35.65 billion, registering an impressive year-over-year growth of 118.8%. Additionally, it surpassed the revenue estimates in each of the trailing four quarters, which is impressive.
The stock has gained 23.3% over the past year to close the last trading session at $157.54.
SZKMY’s POWR Ratings reflect its promising outlook. The stock has an overall A rating, translating to a Strong Buy in our proprietary rating system.
It also has an A grade for Stability and B for Growth, Value, and Quality. In the same industry, it is ranked #7 of 55 stocks. Click here to see additional ratings for SZKMY (Momentum and Sentiment).
Stock to Sell:
Rivian Automotive, Inc. (RIVN)
RIVN designs, develops, manufactures, and sells electric vehicles and accessories. The company manufactures five-passenger pickup trucks and seven-passenger sports utility vehicles. It also offers a Commercial Vehicle platform for Electric Delivery Van in collaboration with Amazon.
In terms of forward EV/Sales, RIVN is trading at 4x, 234.2% higher than the industry average of 1.20x. Likewise, its forward Price/Sales multiple of 5.94 is 558.6% higher than the industry average of 0.89.
RIVN’s trailing-12-month ROCE, ROTC, and ROTA of negative 41.98%, 23.42%, and 35.78% compare to the industry averages of 9.84%, 6.05%, and 3.65%. Also, its trailing-12-month asset turnover ratio of 0.11x is 88.6% lower than the industry average of 0.99x.
During the first quarter that ended March 31, 2023, RIVN’s gross loss increased 6.6% year-over-year to $535 million. Its loss from operations narrowed 9.2% from the year-ago value to $1.43 billion. The company’s adjusted net loss attributable to common stockholders came in at $1.17 billion and $1.25 per share, narrowing 9.1% and 12.6% year-over-year. Also, its adjusted EBITDA loss stood at $1.06 billion.
In addition, its cash and cash equivalents, as of March 31, 2023, amounted to $11.24 billion compared to $11.56 billion for the period ended December 31, 2022.
Analysts expect RIVN’s EPS to remain negative for the fiscal years 2023 and 2024. Moreover, it failed to surpass the revenue estimates in three of the trailing four quarters.
Over the past nine months, the stock has declined 24.5% to close the last trading session at $26.05.
RIVN’s weak fundamentals are reflected in its POWR Ratings. The stock has an overall rating of F, which translates to a Strong Sell in our proprietary rating system.
It also has an F grade for Value, Stability, and Quality. Within the same industry, it is ranked #47. Click here to see the other ratings of RIVN for Growth, Momentum, and Sentiment.
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VWAGY shares were trading at $16.07 per share on Friday afternoon, up $0.04 (+0.22%). Year-to-date, VWAGY has gained 6.81%, versus a 20.25% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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