The Fed’s fight against stubborn inflation has hit its first major roadblock with the recent bank failures. The insolvency issues in the banking sector amid the possibility of the Fed raising interest rates higher than expected have induced immense market volatility lately. Given this backdrop, quality stocks Honda Motor Co., Ltd. (HMC), Ryerson Holding Corporation (RYI), and AutoNation, Inc. (AN) could be ideal investments for solid long-term returns.
After the recent failures of Silicon Valley Bank (SVB) and Signature Bank, the stock market has witnessed heightened volatility, as evidenced by CBOE Volatility Index’s more than 16% gains over the past month. However, the shocking collapse of two major U.S. banks should not deter the Fed from its fight against stubborn inflation, according to former Fed official Thomas Hoenig.
Exactly one year ago, the Federal Open Market Committee (FOMC) enacted its first interest rate hike. The central bank has launched eight rate increases through February 2023. Inflation, as measured by the Consumer Price Index (CPI), has gone down from an 8.5% annual rate then to 6% now. But it is still well above the Fed’s 2% target.
Recent economic data releases indicating jobs growth, strong retail sales, and high inflation levels could keep the Fed on track for another interest rate hike in the coming week, despite concerns that the recent banking crisis could have a broader economic impact.
According to data compiled by CME Group, traders assigned approximately 85% likelihood of a 25-basis-point hike when the FOMC meets next week, taking the federal funds rate to the 4.75%-5% range. Megan Greene, a chief global economist at Kroll Institute, also expects the Fed to hike by 25 bps next week.
On the other hand, some economists expect the central bank to pause aggressive rate hikes as financial markets wobble. Barclay’s, which predicted a rate hike of a half-percentage point last week, has updated its stance and now leans “toward zero.” Furthermore, Goldman Sachs Group Inc. (GS) expects the Fed to pass up the chance to hike rates at its next meeting, citing stress in the banking system.
Amid various macroeconomic headwinds, the stock market is expected to remain highly volatile in the upcoming months. Given this backdrop, quality stocks HMC, RYI, and AN could be ideal long-term investments. Let’s discuss these stocks in detail.
Honda Motor Co., Ltd. (HMC)
Headquartered in Tokyo, Japan, HMC develops, manufactures, and distributes motorcycles, automobiles, power products, and other spare parts 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.
On February 28, 2023, HMC and LG Energy Solution held the official ground-breaking ceremony for a new joint venture (JV) EV battery plant in Fayette, Ohio. In January, both companies entered into a JV agreement to produce lithium-ion batteries for EVs. The facility aims to have an annual production capacity of about 40GWh.
Batteries generated by the venture would be supplied exclusively to HMC plants in North America to power battery EVs. This strategic alliance is expected to boost HMC’s profitability and growth in the upcoming years.
For the third quarter that ended December 31, 2022, HMC’s sales revenue came in at ¥4.44 trillion ($33.38 billion), up 20.3% year-over-year. Its operating profit increased 22.2% year-over-year to ¥280.49 billion ($2.11 billion). In addition, profit for the year attributable to owners of the parent was ¥244.60 billion ($1.84 billion), an increase of 26.8% year-over-year.
In terms of forward EV/EBITDA, HMC is trading at 7.15x, 22.4% lower than the industry average of 9.22x. The stock’s forward EV/Sales and Price/Sales multiple of 0.58 and 0.33 are 48.4% and 62% lower than the industry averages of 1.13 and 0.87, respectively.
Street expects HMC’s revenue to grow 377.9% year-over-year to $127.64 billion for the fiscal year ending March 2023. Also, the company’s revenue is expected to increase 7.9% year-over-year to $137.68 billion for fiscal 2024. Moreover, it surpassed the consensus revenue consensus in three of the trailing four quarters.
Over the past six months, the stock has gained 3.8% to close the last trading session at $25.50.
HMC’s POWR Ratings reflect a promising outlook. The company has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
In addition, it has an A grade for Value and a B for Stability, Sentiment, and Quality. HMC is ranked #3 within the 57-stock Auto & Vehicle Manufacturers industry.
Click here to access the additional POWR Ratings for HMC (Growth and Momentum).
Ryerson Holding Corporation (RYI)
RYI processes and distributes industrial metals internationally. The company provides a line of products in carbon steel, stainless steel, alloy steel, aluminum, nickel, and red metals in different shapes and forms. It serves various industries, such as metal fabrication and machine shops, commercial ground transportation, industrial machinery and equipment, and HVAC.
On March 3, 2023, RYI announced the acquisition of BLP Holdings, LLC, which comprises three divisions: Absolute Metal Products, Metal Cutting Specialists, and Houston Water Jet. BLP and its divisions provide advanced processing solutions, which will diversify RYI’s offerings. Thus, this acquisition aligns with the company’s commitment to growing its high-margin, value-added business.
Also, on November 1, 2022, RYI acquired Excelsior, Inc, a full-service fabrication and machining company with advanced processing capabilities. Steve Bosway, RYI’s President, West Region, said, “This acquisition strengthens RYI’s network of value-added service centers, allowing us to provide better experiences and an extended suite of metal processing solutions for customers in the Western United States.”
RYI reported net Aluminum sales of $269 million, up 1.1% year-over-year in the fiscal fourth quarter that ended December 31, 2022. Net cash provided by operating activities was $181.60 million, up 74.8% year-over-year. The company transformed the balance sheet, with total debt declining 42.6% year-over-year to $367 million.
RYI’s forward non-GAAP P/E of 10.43x is 22.6% lower than the industry average of 13.48x. The stock’s forward EV/Sales multiple of 0.35 is 75.8% lower than the industry average of 1.45. Also, RYI’s 0.31x forward Price/Sales is 78.1% lower than the industry average of 1.08x.
Analysts expect RYI’s EPS to increase 12.9% year-over-year to $3.73 in the fiscal year ending December 2024. Also, the company has surpassed the consensus revenue estimates in three of the four trailing quarters.
Shares of RYI have gained 23.6% over the past six months to close the last trading session at $34.46.
It is no surprise that RYI has an overall B rating, which translates to a Buy in our proprietary rating system.
RYI has an A grade for Value and a B for Quality. Within the Industrial – Metals industry, it is ranked #4 out of 35 stocks.
In addition to the POWR Ratings mentioned above, to see RYI ratings for Growth, Momentum, Sentiment, and Stability, click here.
AutoNation, Inc. (AN)
Automotive retailer AN operates through three segments: Domestic; Import; and Premium Luxury. The company provides a range of automotive products and services, such as new and used vehicles; and parts and services, including automotive repair and maintenance parts. In addition, it offers automotive finance and insurance products.
On January 26, 2023, AN completed the acquisition of RepairSmith, a full-service mobile solution for automotive repair and maintenance with a significant operational footprint in the southern and western United States.
This acquisition creates After-Sales business opportunities, including utilizing another channel to provide service to AN’s existing customer base and introduce additional vehicle owners who have purchased vehicles outside the AutoNation dealer network.
For the fourth quarter that ended December 31, 2022, AN’s revenue was $6.70 billion, an increase of 2% year-over-year, driven by higher average selling prices of vehicles, increased new vehicle unit sales, and continued growth in After-Sales. Its new vehicle retail unit sales increased 4% year-over-year to 60,074. Also, the company’s adjusted EPS grew 11% from the year-ago value to $6.37.
AN’s forward non-GAAP P/E of 6.02x is 56.3% lower than the industry average of 13.76x. Likewise, its forward EV/Sales multiple of 0.46 is 58.8% lower than the industry average of 1.13. And the stock’s 0.23x forward Price/Sales is 73.4% lower than the industry average of 0.87x.
The consensus revenue estimate of $27.22 billion for the fiscal year (ending December 2024) reflects a 1.5% year-over-year improvement. Moreover, the company surpassed its consensus revenue and EPS estimates in three of the trailing four quarters. Shares of AN have gained 18.8% over the past six months and 10.3% over the past year to close the last trading session at $130.07.
AN’s strong fundamentals are apparent in its POWR Ratings. The stock has an overall B rating, equating to a Buy in our proprietary rating system.
AN has an A grade for Value and a B for Quality. It is ranked #2 out of 21 stocks in the Auto Dealers & Rentals industry.
In addition to the POWR Ratings I’ve just highlighted, you can see AN’s Growth, Stability, Sentiment, and Momentum ratings here.
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HMC shares were trading at $25.25 per share on Friday morning, down $0.25 (-0.98%). Year-to-date, HMC has gained 10.45%, versus a 2.91% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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