Despite facing challenges like higher vehicle prices, elevated interest rates, and sticky inflation, the auto sector’s prospects appear promising owing to strong customer demand for new vehicles, easing supply chains, buying incentives, and growing interest in electric vehicles (EVs) and hybrids. Moreover, the anticipated interest rate hikes this year will benefit the industry.
Given this backdrop, fundamentally robust auto stocks Volkswagen AG (VWAGY), Gentherm Incorporated (THRM), and American Axle & Manufacturing Holdings, Inc. (AXL) could be solid portfolio additions, given their strong growth prospects. Before diving deeper into their fundamentals, let’s discuss what’s happening in the auto industry.
New vehicle sales in the U.S. marked a 5.1% uptick in the first quarter of 2024, showcasing sustained consumer demand despite the high interest rates. The auto industry’s growth is expected to be driven by the ever-rising adoption of EVs and hybrids. S&P Global Mobility forecasts global new vehicle sales of 88.3 million this year, a rise of 2.8% over 2023.
Meanwhile, global electric car sales are expected to reach around 17 million by the end of the year. The global automotive industry is projected to reach a market size of $6.86 trillion, growing at a 6.8% CAGR by 2033. Moreover, historically high prices for new and used cars have forced potential new car buyers to keep their existing cars longer.
This will likely boost the demand for auto parts as older vehicles require more maintenance. Additionally, modern-day vehicles have become more technologically advanced through sensors, microprocessors, cameras, etc., meaning that they require greater maintenance due to the use of several components. The auto parts market is expected to reach $1.10 trillion by 2030, growing at a CAGR of 6.8%.
With these favorable trends in mind, let's delve into the fundamentals of the three auto stock picks.
Volkswagen AG (VWAGY)
Headquartered in Wolfsburg, Germany, VWAGY manufactures and sells automobiles in Germany, Europe, North America, South America, the Asia-Pacific, and internationally. The company operates through four segments: Passenger Cars and Light Commercial Vehicles, Commercial Vehicles, Power Engineering, and Financial Services.
On February 16, VWAGY announced its collaboration with Mahindra & Mahindra Ltd. (M&M) to supply components of Volkswagen´s MEB for Mahindra’s purpose-built electric platform INGLO, covering the supply of certain electric components and unified cells. This e-mobility supply agreement has strengthened the relations between the two companies.
VWAGY’s trailing-12-month EBIT margin of 7.64% is marginally higher than the industry average of 7.59%. Similarly, its trailing-12-month net income margin of 5.15% is 14.4% higher than the industry average of 4.50%.
Over the past three and five years, its revenue grew at CAGRs of 13.1% and 6.4%, respectively. Its EBITDA grew at a CAGR of 14.3% over the past three years.
VWAGY’s sales revenue and operating result for the fiscal year that ended December 31, 2023, stood at €322.28 billion ($344.69 billion) and €22.58 billion ($24.15 million), up 15.5% and 2.1% year-over-year, respectively.
For the same year, its earnings after tax of which attributable to VWAGY shareholders and earnings per ordinary share, increased 7.6% each from the previous year to €16.01 billion ($17.13 billion) and €31.92, respectively.
Street expects VWAGY’s revenue for the quarter ending June 30, 2024, to increase marginally year-over-year to $88.50 billion. Its EPS for the year ending December 31, 2024, is expected to grow 67.2% year-over-year to $5.84. Over the past six months, the stock has gained 24.7% to close the last trading session at $14.84.
VWAGY’s strong fundamentals are reflected in its POWR Ratings. It has an overall B rating, equating to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
It has an A grade for Value and Stability and a B for Growth. It is ranked #11 out of 51 stocks in the Auto & Vehicle Manufacturers industry. Click here to see the additional POWR Ratings for VWAGY (Momentum, Sentiment, and Quality).
Gentherm Incorporated (THRM)
THRM designs, develops, manufactures, and sells thermal management and pneumatic comfort technologies in the U.S. and internationally. The company operates in two segments: Automotive and Medical.
THRM’s trailing-12-month asset turnover ratio of 1.19x is 19.3% higher than the industry average of 1.00x. Similarly, its trailing-12-month Return on Total Capital of 6.96% is 15.8% higher than the industry average of 6.01%.
Over the past three and five years, its revenue grew at CAGRs of 17.2% and 7%, respectively. Its total assets grew at a CAGR of 6.5% over the past three years.
THRM’s product revenues and gross margin for the fiscal fourth quarter that ended December 31, 2023, stood at $366.93 million and $96.30 million, up 6.9% and 37.9% year-over-year, respectively. In addition, its net income stood at $18.09 million, compared to an adjusted net loss of $4.21 million.
For the same quarter, its adjusted EBITDA and EPS increased 19.7% and 91.5% from the prior-year quarter to $49.02 million and $0.90, respectively.
For the quarter ending June 30, 2024, THRM’s revenue and EPS are expected to increase 3.2% and 13.6% year-over-year to $384.37 million and $0.66, respectively. The stock has gained 5.3% over the past three months, closing the last trading session at $50.74.
THRM’s POWR Ratings reflect its positive prospects. It has an overall B rating, equating to Buy in our proprietary rating system.
THRM has a B grade for Growth and Quality. Within the A-rated Auto Parts industry, it is ranked #24 out of 62 stocks. To see the additional POWR Ratings of THRM for Value, Momentum, Stability, and Sentiment, click here.
American Axle & Manufacturing Holdings, Inc. (AXL)
AXL designs, engineers, and manufactures driveline and metal-forming technologies that support electric, hybrid, and internal combustion vehicles. It operates through two segments: Driveline and Metal Forming segments.
AXL’s trailing-12-month CAPEX / Sales of 3.24% is 6.6% higher than the industry average of 3.04%. Similarly, its trailing-12-month levered FCF margin of 5.51% is 1.2% higher than the industry average of 5.44%.
Over the past three years, AXL’s revenue grew at a CAGR of 8.9%. Similarly, its levered FCF grew at a CAGR of 7.1% during the same period.
For the fiscal fourth quarter that ended December 31, 2023, AXL’s net sales increased 5% year-over-year to $1.46 billion, and its gross profit stood at $154.90 million. In addition, its adjusted EBITDA stood at $169.50 million, up 7.5% from the year-ago quarter. As of December 31, 2023, AXL’s total current assets amounted to $2.01 billion, compared to $1.99 billion as of December 31, 2022.
Analysts expect AXL’s revenue and EPS for the quarter ending June 30, 2024, to increase 1.4% and 6.4% year-over-year to $1.59 billion and $0.13, respectively. The company surpassed consensus revenue and EPS estimates in three of the trailing four quarters. The stock has gained 7.4% over the past six months to close the last trading session at $7.56.
AXL’s POWR Ratings reflect this promising outlook. It has an overall rating of B, equating to Buy in our proprietary rating system.
AXL has a B grade for Growth, Value, and Sentiment. Within the Auto Parts industry, it is ranked #18. To see AXL’s Momentum, Stability, and Quality ratings, click here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
VWAGY shares were trading at $14.58 per share on Thursday morning, down $0.26 (-1.78%). Year-to-date, VWAGY has gained 12.33%, versus a 5.26% rise in the benchmark S&P 500 index during the same period.
About the Author: Neha Panjwani
From her school days, Neha harbored a profound fascination for finance, a passion that steered her toward a career as an investment analyst following the completion of her bachelor's degree in commerce. Currently enrolled in the CFA program, Neha is dedicated to further enriching her comprehension of investment fundamentals. Neha's primary objective is to aid retail investors in discerning optimal investment opportunities by diligently evaluating crucial aspects of financial instruments, with a primary focus on stocks and ETFs. Her commitment lies in empowering individuals to make informed and strategic investment decisions in the dynamic world of finance.
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