A notable upswing in consumer demand for vehicles is propelled by a rebounding economy, stable interest rates, and heightened consumer confidence.
So, I consider Honda Motor Co., Ltd. (HMC) and Continental Aktiengesellschaft (CTTAY) as potentially sound investment choices. At the same time, Tesla, Inc. (TSLA) could be best avoided, given its grim fundamentals.
Despite facing challenges, new car sales in the U.S. saw a notable upswing in the third quarter. Electric vehicle sales reached a record high, surpassing 300,000 units in the U.S. The cumulative sales for the first nine months totaled 873,000.
The electric vehicles market is anticipated to reach $70.10 billion in revenue this year and is forecasted to grow at a CAGR of 18.2%, reaching $161.60 billion by 2028.
Besides, global auto sales are poised to reach an estimated 86.80 million units in 2023, surpassing earlier forecasts, driven by robust consumer demand and anticipated improvements in inventory management. This upward trajectory is forecasted to persist in 2024, with sales projected to reach 90.20 million units, primarily credited to the improved performance of the supply chain.
Moreover, technological advancements and innovations in the industry contribute to increased production capabilities. The integration of automation, artificial intelligence, and other cutting-edge technologies is enhancing efficiency and allowing manufacturers to streamline their production processes.
Notably, U.S. motor vehicle production is projected to reach approximately 11.7 million units by 2025.
Furthermore, the automotive part industry is expected to experience long-term solid growth driven by rising demand for customization, the adoption of advanced technologies like navigation and driver assistance systems, and the emergence of e-commerce platforms offering automotive parts.
The global automotive aftermarket industry’s revenue is expected to grow at a CAGR of 4% to reach $589.01 billion by 2030.
Stocks to Buy:
Honda Motor Co., Ltd. (HMC)
Based in Tokyo, Japan, HMC is a global company involved in the development, manufacturing, and distribution of motorcycles, automobiles, power products, and more. It operates through segments like Motorcycle; Automobile; Financial Services; and Power Product, offering a diverse range of products and services worldwide.
HMC’s trailing-12-month EBITDA and levered FCF margins of 12.94% and 8.42% are 18.6% and 67.2% higher than the 10.91% and 5.04% industry averages.
In November HMC unveiled its full 24YM lineup at EICMA in Milan, featuring four new models, significant enhancements to four existing ones, and a preview of their upcoming electric vehicle designed for the European market.
The company distributes an annual dividend of $1.02, which yields 4.01% on the current market price, higher than its four-year average dividend yield of 3.37%.
In the fiscal second quarter ended September 30, 2023, HMC’s sales revenue grew 17.1% year-over-year to ¥4.98 trillion ($34.92 billion). It generated an operating profit of ¥302.13 billion ($2.11 billion), up 30.7% year-over-year.
The company earned profit for the period of ¥270.98 billion ($1.90 billion), up 32.1% from the previous year quarter. Also, its EPS grew 39.4% year-over-year to ¥51.49.
For the fiscal year ending March 31, 2024, there is a positive outlook for HMC based on the forecasted financial results. The key highlights include an expected increase in sales revenue by 18.3% from the previous year to ¥20 trillion ($140.22 billion), operating profit by 53.7% year-over-year to ¥1.20 trillion ($8.41 billion), and profit for the year to grow 39.4% year-over-year to ¥1 trillion ($7.01 billion).
HMC’s revenue and EPS are expected to grow 435.1% and 42.4% year-over-year to $142.63 billion and $4.07 for the fiscal year ending March 2024.
The stock soared 30.4% year-to-date to close the last trading session at $29.81. It has returned 25.4% over the past year.
HMC’s POWR Ratings reflect this promising outlook. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted optimally.
HMC has an A grade for Value and Stability and a B for Quality. Within the 51-stock Auto & Vehicle Manufacturers industry, it is ranked #5.
To see HMC’s additional POWR Ratings for Growth, Momentum, and Sentiment, click here.
Continental Aktiengesellschaft (CTTAY)
Headquartered in Hanover, Germany, CTTAY is a technology company that offers intelligent solutions for vehicles, machines, traffic, and transportation worldwide. It operates through four sectors: Automotive; Tires; ContiTech; and Contract Manufacturing.
CTTAY’s trailing-12-month EBITDA margin of 12.34% is 13.1% higher than the industry average of 10.91%. Its trailing-12-month CAPEX/Sales of 5.18% is 70.4% higher than the 3.04% industry average.
In November, CTTAY announced its goal to enhance the competitiveness of its Automotive sector by simplifying and streamlining business and administrative structures. The planned measures aim to reduce sector costs by €400 million ($436.61 million) annually by 2025.
Additionally, its Automotive sector is exploring efficiency measures in the R&D area. The business structure will be streamlined by dissolving the Smart Mobility business area and consolidating it into five areas: Architecture and Networking, Autonomous Mobility, Safety and Motion, Software and Central Technologies, and User Experience.
In the same month, CTTAY announced the "DIAZI" project, aimed at digitalizing automotive component production. The three-year initiative, supported by the German Federal Ministry and involving eight partners, focuses on fully digitalized production, AI-based data analysis, and continuous optimization.
The project aims to improve efficiency, flexibility, and cost-effectiveness, contributing to sustainable mobility. Initial successes, such as the accelerated production of new display solutions, indicate progress toward establishing a "digital factory."
CTTAY’s sales increased 6.4% year-over-year to €30.97 billion ($33.80 billion) in the nine months that ended September 30, 2023. Its adjusted EBIT rose 20.3% over the prior-year period to €1.71 billion ($1.87 billion).
The company’s net income attributable to the shareholders of its parent and EPS came in at €889.40 million ($970.81 million) and €4.45, compared to a net loss and loss per share of €222 million ($242.32 million) and €1.11, respectively, during the same period last year.
CTTAY’s EPS and revenue are expected to improve significantly year-over-year to $0.51 and $45.51 billion in the fiscal year 2023.
Over the past year, the stock has gained 28.8% to close the last trading session at $8.28.
CTTAY’s POWR Ratings reflect its solid prospects. It has an overall rating of B, equating to a Buy in our proprietary rating system.
It has an A grade for Value and Stability and a B for Quality. Within the A-rated Auto Parts industry, it is ranked #13 out of 62 stocks.
Beyond what we stated above, we also have given CTTAY grades for Growth, Momentum, and Sentiment. Get all the CTTAY ratings here.
Stock to Sell:
Tesla, Inc. (TSLA)
TSLA designs, develops, manufactures, leases, and sells electric vehicles and energy generation and storage systems in the United States, China, and internationally. It operates in two segments: Automotive and Energy Generation and Storage.
TSLA’s trailing-12-month gross profit margin of 19.81% is 44.2% lower than the 35.47% industry average. Its 1.68% trailing-12-month levered FCF margin is 66.6% lower than the 5.04% industry average.
On December 9, it was reported that TSLA was increasing pay for hourly workers at its battery factory in Nevada, with raises ranging from $2 to $8.30 per hour. The adjustments will elevate hourly wages from $20 to $22 on the low end and from $30.65 to $34.50 on the high end.
TSLA’s total revenues for the third quarter ended September 30, 2023, came in at $23.35 billion. Its total gross profit decreased 22.4% year-over-year to $4.18 billion. Its non-GAAP net income attributable to common stockholders decreased 36.6% year-over-year to $2.32 billion. The company’s non-GAAP EPS came in at $0.66, representing a decline of 37.1% year-over-year.
Analysts expect TSLA’s EPS for the fourth quarter ending December 31, 2023, to decrease 38.3% year-over-year to $0.73. Its revenue is likely to be $25.56 billion in the same quarter. The company has failed to exceed the consensus revenue estimates in three of the trailing four quarters, which is disappointing.
Over the past three months, the stock has declined 8.1% to close the last trading session at $252.08.
TSLA’s POWR Ratings reflect its weak fundamentals. The stock has an overall rating of D, equating to a Sell in our proprietary rating system.
It has an F grade for Value and a D for Growth, Stability, and Sentiment. It is ranked #39 in the Auto & Vehicle Manufacturers industry.
Click here to see TSLA’s Momentum and Quality ratings.
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.
HMC shares were trading at $30.25 per share on Tuesday morning, up $0.44 (+1.48%). Year-to-date, HMC has gained 35.75%, versus a 25.33% rise in the benchmark S&P 500 index during the same period.
About the Author: Kritika Sarmah
Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.
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