While the auto manufacturing industry is facing production-related challenges, increasing interest in electric vehicles (EV) and tax credits should allow it to grow in the long run. Leading EV giant Tesla (TSLA) has skyrocketed over the past decade, but its high valuation and meme-stock features remain a concern. On the other hand, HMC possesses sound fundamentals to lead the industry in years to come but is trading at a discount to its peers. Read more….
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The auto manufacturing industry witnesses rising production challenges due to continuing shortages in the semiconductor chip and raw materials. High inflation and rising interest rates could also mar the growth in demand.
However, tax credits, cost-efficiency, and long-term sustainability have led consumers to shift to electric vehicles (EVs). Rising investments by several nations to electrify vehicles should drive the industry’s long-term growth. The global electric vehicle market is expected to grow at an 18.2% CAGR to reach $823.75 billion by 2030.
While EV giant Tesla, Inc. (TSLA) skyrocketed over the past several years and its financials have improved substantially, the stock appears to be trading at a valuation that no longer justifies its future growth prospects. In terms of forward non-GAAP P/E, TSLA is trading at 59x, 429% higher than the industry average of 11.15x. Therefore, it might lose significantly amid the ongoing bear market.
On the other hand, Tokyo, Japan-based Honda Motor Co., Ltd. (HMC) looks well-positioned to lead the industry in the years to come. Given the company’s solid growth prospects, the stock looks reasonable at its current valuation. In fact, it is trading at a discount to its peers. Therefore, HMC could be a better investment than TSLA.
Let’s see what could drive HMC’s performance.
Honda Motor Co., Ltd. (HMC)
HMC develops, manufactures, and distributes motorcycles, automobiles, and power products. It also sells spare parts and provides after-sales services directly through retail dealers, independent distributors, and licensees.
HMC produced 244,368 vehicles in May 2022, representing an 85.5% rise from the prior-year period. On June 21, 2022, HMC’s China subsidiary Honda Motor (China) Investment Co., Ltd., announced that its automobile production and sales JV, GAC Honda Automobile Co., Ltd. (GAC Honda), began construction of a new EV plant.
With an initial investment of RMB3.49 billion ($521.81 million) and the adoption of advanced production technologies, this highly efficient, smart, and low-carbon EV plant will possess an annual production capacity of 120,000 units from 2024 onwards.
For the fiscal 2022 fourth quarter ended March 31, 2022, HMC’s sales revenue increased 10.5% year-over-year to ¥3.88 trillion ($28.57 billion). The company’s operating profit came in at ¥199.59 billion ($1.47 billion), representing a 6.4% decline from the prior-year period.
Its net profit came in at ¥144.50 billion ($1.07 billion), down 35.4% from its year-ago period. HMC’s EPS came in at ¥73.02, indicating a 40.9% year-over-year decline. As of March 31, 2022, the company had ¥3.68 trillion ($27.09 billion) in cash and cash equivalents.
Over the past three years, HMC’s EBITDA and total assets have grown at 13.6% and 5.5%, respectively.
Analysts expect HMC’s EPS to increase 2.2% year-over-year in fiscal 2023, ending March 31, 2023, and 15.1% in fiscal 2024. Its revenue is expected to grow 357.7% year-over-year in fiscal 2023 and 8.5% in fiscal 2024.
In terms of forward EV/EBITDA, HMC’s 7.6x compares with the industry average of 8.07x. Its 0.62x forward EV/Sales is 39.9% lower than the 1.03x industry average.
POWR Ratings Indicate Better Performance for HMC
While HMC has an overall A grade, which translates to Strong Buy in our proprietary POWR Ratings system, TSLA has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
HMC has an A grade for Value, which is in sync with its lower-than-industry valuation ratios. TSLA’s D grade for Value is in sync with its overvaluation. TSLA’s 8.44x forward EV/Sales is 716.3% higher than the 1.03x industry average.
HMC has been graded a B in terms of Stability, which is in sync with its lower volatility compared to broader markets. HMC has a 0.96 beta. TSLA’s D grade for Stability reflects its beta of 2.13.
Of the 66 stocks in the Auto & Vehicle Manufacturers industry, HMC is ranked #1, while TSLA is ranked #30.
Beyond what we have stated above, our POWR Ratings system has graded TSLA and HMC for Sentiment, Quality, Growth, and Momentum. Get all HMC ratings here. Also, click here to see the additional POWR Ratings for TSLA.
Our research shows that the odds of success increase if one invests in stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Auto & Vehicle Manufacturers industry.
TSLA shares were trading at $695.20 per share on Wednesday afternoon, down $4.00 (-0.57%). Year-to-date, TSLA has declined -34.22%, versus a -18.71% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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