The combination of easing supply chains and falling inflation is boosting the prospects of the auto industry. Despite high borrowing costs, the auto industry is well-positioned to witness higher sales this year as demand remains strong.
Considering these factors, it could be wise to buy fundamentally strong auto stocks, Rolls-Royce Holdings plc (RYCEY), Stellantis N.V. (STLA), and Honda Motor Co., Ltd. (HMC). These stocks are rated “A” (Strong Buy) in our proprietary POWR Ratings system.
Before diving deeper into their fundamentals, let’s discuss why the auto industry is expected to perform well.
Sales of new vehicles last year dropped to their lowest level since 2011 due to the challenges posed by high inflation, rising interest rates, and supply chain constraints. However, auto sales have bounced back strongly this year as total new-vehicle sales in August rose 16.2% year-over-year to 1.34 million. The gains were driven by new-vehicle inventory hitting the highest level in more than two years.
Furthermore, the auto industry is experiencing tailwinds from the growing adoption of electric vehicles (EVs). Thanks to government incentives, price cuts, and expanding charging infrastructure, EVs are continuing to form a major part of new vehicle sales. In the second quarter, U.S. consumers bought more than 295,000 battery-electric vehicles (BEVs), higher than in the entire 2019.
Sales of battery-electric vehicles are expected to surpass the 1 million mark this year. With strong demand and sufficient inventories available at dealerships, the auto industry is expected to display strong growth. Cox Automotive has forecast that new vehicle sales will rise 8% over the prior year to 15 million in 2023.
Given the industry tailwinds, it’s time to examine the fundamentals of the top three stocks to buy in the Auto & Vehicle Manufacturers industry, starting with the third in line.
Stock #3: Rolls-Royce Holdings plc (RYCEY)
Headquartered in London, RYCEY operates as an industrial technology company. The company operates in four segments: Civil Aerospace, Defense, Power Systems, and New Markets.
On February 14, 2023, RYCEY announced receiving an order from Air India for 68 Trent XWB-97 engines plus options for 20 more. This is the company’s biggest-ever order for the Trent XWB-97. Air India has also ordered 12 Trent XWB-84 engines.
In terms of forward EV/EBITDA, RYCEY’s 9.52x is 14.1% lower than the 11.08x industry average. Its 1.44x forward EV/Sales is 17.3% lower than the 1.74x industry average. Likewise, its 1.23x forward Price/Sales is 7.8% lower than the 1.34x industry average.
RYCEY's underlying revenue for the half-year ended June 30, 2023, increased 30.9% year-over-year to £6.95 billion ($8.71 billion). Its underlying gross profit rose 60.8% over the prior-year quarter to £1.52 billion ($1.90 billion). In addition, its net cash inflow from operating activities increased 90.1% year-over-year to £1.14 billion ($1.43 billion).
The company’s underlying profit for the period from continuing operations came in at £404 million ($506.45 million), compared to an underlying loss for the period from continuing operations of £188 million ($235.68 million). Also, its EPS came in at 4.90p, compared to a loss per share of 2.24p in the year-ago period.
Street expects RYCEY’s EPS and revenue for fiscal 2023 to increase 320.3% and 19.3% year-over-year to $0.10 and $18.21 billion, respectively. Over the past year, the stock has gained 190% year-to-date to close the last trading session at $2.63.
RYCEY’s POWR Ratings reflect solid prospects. It 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.
Within the Auto & Vehicle Manufacturers industry, it is ranked #7 out of 56 stocks. It has a B grade for Growth, Value, and Momentum. Click here to see the other ratings of RYCEY for Stability, Sentiment, and Quality.
Stock #2: Stellantis N.V. (STLA)
Headquartered in Hoofddorp, the Netherlands, STLA designs, manufactures, distributes, and sells automobiles and light commercial vehicles, engines, transmission systems, metallurgical products, mobility services, and production systems worldwide. It offers its products under the Abarth, Alfa Romeo, Chrysler, DS, Dodge, Jeep, Fiat, Maserati, Ram, Opel, Lancia, Vauxhall, Peugeot, Comau, and Teksid brands.
On July 24, 2023, STLA and Samsung SDI announced that they had signed an MOU to establish a second battery plant in the U.S. under the existing StarPlus Energy joint venture, targeting to start production in 2027 with an annual production capacity of 34 GWh. This supports Stellantis' aim to offer 25 new electric vehicles in North America by the decade's end and move towards carbon neutrality by 2038.
On July 6, 2023, STLA and NioCorp Developments Ltd. announced the signing of a Rare Earth Offtake Term Sheet. The Term Sheet envisions a definitive agreement for a 10-year offtake contract for specific amounts of neodymium-praseodymium oxide, dysprosium oxide, and terbium oxide that NioCorp aims to produce at its Elk Creek Critical Minerals Project in southeast Nebraska.
The supply agreement will support STLA’s efforts to build reliable supply chains and achieve its sustainability goals.
In terms of forward non-GAAP P/E, STLA’s 2.85x is 80.4% lower than the 14.51x industry average. Its 0.27x forward Price/Sales is 68.1% lower than the 0.86x industry average. Likewise, its 0.61x forward Price/Book is 74.9% lower than the 2.44x industry average.
STLA’s net revenues for the six months ended June 30, 2023, increased 11.8% year-over-year to €98.37 billion ($105.52 billion). Its net profit increased 37.2% year-over-year to €10.92 billion ($11.71 billion). Its adjusted operating income rose 11% year-over-year to €14.13 billion ($15.16 billion). The company’s EPS came in at €3.45, representing an increase of 39.7% year-over-year.
Analysts expect STLA’s revenue for the quarter ending September 30, 2023, to increase 19.2% year-over-year to $48.94 billion. Its EPS for fiscal 2023 is expected to increase 15.4% year-over-year to $6.37. Over the past year, the stock has gained 41.9% to close the last trading session at $18.16.
STLA’s positive outlook is reflected in its POWR Ratings. It has an overall rating of A, which translates to Strong Buy in our proprietary rating system.
It has an A grade for Value and a B for Stability, Sentiment, and Quality. It is ranked #3 in the same industry. To see the other ratings of STLA for Growth and Momentum, click here.
Stock #1: Honda Motor Co., Ltd. (HMC)
Headquartered in Tokyo, Japan, HMC develops, manufactures, and distributes motorcycles, automobiles, power products, and other products 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 groundbreaking ceremony for their joint venture EV battery plant spread over 2 million square feet. The facility is scheduled to be completed by the end of 2024, aiming for an annual production capacity of 40 GWh. The JV company will deliver lithium-ion batteries to support HMC’s plan to build battery-electric vehicles (BEV) in North America.
In terms of forward EV/Sales, HMC’s 0.66x is 43.1% lower than the 1.16x industry average. Its 0.42x forward Price/Sales is 51.7% lower than the 0.86x industry average. Likewise, its 10.42x forward EV/EBIT is 20.7% lower than the 13.13x industry average.
For the first quarter that ended June 30, 2023, HMC’s sales revenue increased 20.8% year-over-year to ¥4.62 trillion ($31.32 billion). The company’s operating profit increased 77.5% year-over-year to ¥394.45 billion ($2.67 billion). Its profit for the period increased 134.1% year-over-year to ¥382.95 billion ($2.60 billion). In addition, its EPS came in at ¥219.06, representing an increase of 151.1% year-over-year.
For the quarter ending September 30, 2023, HMC’s revenue is expected to increase 18.2% year-over-year to $34.33 billion. Its EPS for the fiscal year 2024 is expected to increase 29.8% year-over-year to $3.71. The stock has gained 46.2% year-to-date to close the last trading session at $33.43.
HMC’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, which translates to Strong Buy in our proprietary rating system.
It is ranked first in the Auto & Vehicle Manufacturers industry. It has an A grade for Value and Stability and a B for Growth, Sentiment, and Quality. To see the HMC’s Momentum rating, click here.
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STLA shares fell $0.03 (-0.17%) in premarket trading Thursday. Year-to-date, STLA has gained 27.61%, versus a 16.88% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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