Despite specific challenges, the automobile industry is likely to continue its growth this year, driven by robust demand for new cars, a shift to electric vehicles (EVs) accelerated by government incentives, expected interest rate cuts by central banks around the world, and improving supply-chain conditions. Furthermore, the introduction of cutting-edge technologies strengthens the sector's potential for further expansion.
Given the industry’s bright prospects, it could be wise to buy fundamentally strong auto stocks Mercedes-Benz Group AG (MBGAF), Mazda Motor Corporation (MZDAY), Honda Motor Co., Ltd. (HMC). and REV Group, Inc. (REVG), given their strong growth prospects.
Before diving deeper into their fundamentals, let’s discuss what’s shaping the industry’s prospects.
Global new vehicle sales dipped in 2022 due to supply chain disruptions, a shortage of semiconductors, a sales drop in China, etc. However, new car sales rebounded strongly last year despite high inflation and rising interest rates. Due to strong demand for new vehicles, auto manufacturers ramped up production. The industry also benefitted from the easing of supply chains.
According to S&P Global Mobility, 2023, global light vehicle sales are projected to reach nearly 86 million units, representing an increase of 8.9% over the prior year. Also, global light vehicle production in 2023 is expected to stand at 89.8 million units, a rise of 9% over 2022.
Despite expectations of slower economic growth and sticky inflation, global light vehicle sales this year are likely to be supported by the lingering pent-up demand, leading to an increase of 2.8% year-over-year to 88.3 million units. Fitch believes that normalized vehicle pricing and mix will bring back customers who were priced out of the market.
Moreover, the industry is expected to benefit from the adoption of electric vehicles (EVs). EVs have become extremely popular amongst prospective car buyers due to government subsidies, expanding public charging infrastructure, price cuts, and sustainability concerns. BloombergNEF forecasts that there will be 730 million passenger EVs on the road by 2040.
Considering these conducive trends, let’s analyze the fundamental aspects of the four Auto & Vehicle Manufacturers picks, beginning with the fourth choice.
Stock #4: Mercedes-Benz Group AG (MBGAF)
Headquartered in Stuttgart, Germany, MBGAF operates as an automotive company globally. The company develops, manufactures, and sells premium and luxury cars and vans under the Mercedes-AMG, Mercedes Benz, Mercedes-Maybach, and Mercedes-EQ brands, as well as related spare parts and accessories. It also provides financing, leasing, car subscription and rental, and other services.
On September 18, 2023, MBGAF announced that it signed an agreement with Steel Dynamics, Inc. (SDI) to source more than 50,000 tonnes of CO2-reduced steel annually for its plant in Tuscaloosa, Alabama. The deal is part of MBGAF’s efforts to decarbonize its global steel supply chain.
In terms of the trailing-12-month EBIT margin, MBGAF’s 12.07% is 58.3% higher than the 7.63% industry average. Likewise, its 14.57% trailing-12-month EBITDA margin is 33.7% higher than the industry average of 10.90%. Furthermore, the stock’s 9.82% trailing-12-month net income margin is 115.6% higher than the industry average of 4.56%.
MBGAF’s revenue for the fiscal third quarter ended September 30, 2023, came in at €37.20 billion ($40.28 billion). Its adjusted EBIT stood at €4.92 billion ($5.32 billion). The company’s net profit came in at €3.72 billion ($4.03 billion). Also, its EPS came in at €3.44. In addition, battery electric vehicles (BEVs) rose 66% year-over-year to 61,621 units.
Analysts expect MBGAF’s revenue for fiscal 2023 to increase 2.8% year-over-year to $164.83 billion. Over the past three months, the stock has gained 13.9% to close the last trading session at $67.30.
MBGAF’s strong fundamentals are reflected in its POWR Ratings. It 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.
Within the Auto & Vehicle Manufacturers industry, it is ranked #4 out of 58 stocks. It has a B grade for Growth, Value, Momentum, Stability, and Quality. Click here to see MBGAF’s rating for Sentiment.
Stock #3: Mazda Motor Corporation (MZDAY)
Headquartered in Hiroshima, Japan, MZDAY manufactures and sells passenger cars and commercial vehicles in Japan, China, North America, Europe, and internationally.
In terms of the trailing-12-month Return on Total Capital, MZDAY’s 6.25% is 2.6% higher than the 6.09% industry average. Likewise, its 4.71% trailing-12-month Return on Total Assets is 17.3% higher than the industry average of 4.01%. Furthermore, the stock’s 1.34x trailing-12-month asset turnover ratio is 35.7% higher than the industry average of 0.99x.
For the six months that ended September 30, 2023, MZDAY’s net sales increased 41.1% year-over-year to ¥2.32 trillion ($15.69 billion). Its operating income increased 134.6% over the prior-year period to ¥129.61 billion ($876.67 million). The company’s net income attributable to owners of the parent increased 25.9% year-over-year to ¥108.13 billion ($731.38 million).
Also, its EPS came in at ¥171.49, registering an increase of 25.9% over the prior year period.
Street expects MZDAY’s revenue for the quarter ended December 31, 2023, to increase 3.7% year-over-year to $8.31 billion. Over the past nine months, the stock has gained 34.4% to close the last trading session at $5.98.
MZDAY’s positive outlook is reflected in its POWR Ratings. It has an overall rating of A, equating to a Strong Buy in our proprietary rating system.
It has an A grade for Value and Quality and a B for Stability. It is ranked #3 in the same industry. One can access MZDAY’s Growth, Momentum, and Sentiment ratings, click here.
Stock #2: Honda Motor Co., Ltd. (HMC)
Based in Tokyo, Japan, HMC develops, manufactures, and distributes motorcycles, automobiles, power, and other products globally. It operates through four segments: Motorcycle Business, Automobile Business, Financial Services Business, and Power Product and Other Businesses. The company also sells spare parts and provides after-sale services through retail dealers directly, etc.
In terms of the trailing-12-month levered FCF margin, HMC’s 8.19% is 50.4% higher than the 5.45% industry average. Likewise, its 12.94% trailing-12-month EBITDA margin is 18.8% higher than the industry average of 10.90%. Furthermore, the stock’s 5.04% trailing-12-month net income margin is 10.6% higher than the industry average of 4.56%.
HMC’s sales revenue for the fiscal second quarter ended September 30, 2023, increased 17.1% year-over-year to ¥4.98 trillion ($33.68 billion). Its operating profit increased 30.7% year-over-year to ¥302.13 billion ($2.04 billion). The company’s profit for the period increased 32.1% over the prior year quarter to ¥270.98 billion ($1.83 billion). Also, its EPS came in at ¥51.49, registering an increase of 39.4% year-over-year.
For fiscal 2024, HMC’s revenue and EPS are expected to increase 415.4% and 46.6% year-over-year to $137.36 billion and $4.19, respectively. Over the past year, the stock has gained 35.6% to close the last trading session at $33.34.
HMC’s solid prospects are reflected in its POWR Ratings. It has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
It has an A grade for Value and Stability and a B for Sentiment and Quality. Within the Auto & Vehicle Manufacturers industry, it is ranked #2. To see HMC’s additional ratings for Growth and Momentum, click here.
Stock #1: REV Group, Inc. (REVG)
REVG designs, manufactures, and distributes specialty vehicles and related aftermarket parts and services internationally. It operates through the Fire & Emergency, Commercial, and Recreation segments. The company sells its products to municipalities, government agencies, private contractors, consumers, and industrial and commercial end users.
On January 29, 2024, REVG announced its exit from its school bus business and transit bus manufacturing business. These exits are part of its strategic actions aimed at optimizing its product portfolio and balance sheet. REVG will be reorganized into two reporting segments beginning with the first quarter of fiscal 2024.
In terms of the trailing-12-month Return on Total Capital, REVG’s 8.90% is 28.3% higher than the 6.93% industry average. Likewise, its 1.92x trailing-12-month asset turnover ratio is 136.6% higher than the industry average of 0.81x.
For the fiscal fourth quarter, which ended on October 31, 2023, REVG’s net sales increased 11.2% year-over-year to $693.30 million. Its gross profit increased 43% over the prior year quarter to $95.50 million. The company’s adjusted EBITDA increased 61.2% year-over-year to $54 million.
Additionally, its adjusted net income increased 95.7% year-over-year to $31.70 million. Its adjusted net income per common share came in at $0.53, representing an increase of 89.3% over the prior-year quarter.
Street expects REVG’s EPS for the quarter ending April 30, 2024, to increase 21% year-over-year to $0.42. Its revenue for fiscal 2025 is expected to increase 6.3% year-over-year to $2.80 billion. It surpassed the consensus EPS estimates in each of the trailing four quarters, which is impressive. Over the past nine months, the stock has gained 87.4% to close the last trading session at $20.11.
It’s no surprise that REVG has an overall rating of A, which translates to a Strong Buy in our POWR Ratings system.
It has a B grade for Growth, Value, Stability, and Quality. It is ranked first in the same industry. In addition to the POWR Ratings we’ve stated above, we have also given REVG ratings for Momentum and Sentiment. Get all REVG ratings here.
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MBGAF shares were trading at $67.60 per share on Tuesday afternoon, up $0.30 (+0.45%). Year-to-date, MBGAF has declined -2.17%, versus a 3.30% 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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