Despite macroeconomic challenges, the auto industry is poised for growth thanks to strong customer demand, the shift to Electric Vehicles (EVs), government incentives, and improved supply chains.

Given this backdrop, let's explore the potential of NIO Inc. (NIO) and Honda Motor Co., Ltd. (HMC). Before diving deeper into the fundamentals of these stocks, let’s discuss why the auto industry is well-positioned for growth.

The rise in eco-friendly transportation choices is boosting the auto industry. Automakers are investing heavily in research and development (R&D) to support this shift towards sustainable transportation. EVs are predicted to be a major driving force for the industry's future growth.

With better supply and strong demand, global auto sales are projected to reach 86.8 million units in 2023, surpassing earlier estimates. In 2024, it's expected to hit 90.2 million units, mainly due to supply chain improvements.

Furthermore, the industry is growing significantly because of the worldwide move towards EVs. This shift is backed by supportive government policies, automaker dedication to EVs, and rising concerns about climate change. All these factors are boosting the demand for electric vehicles among consumers globally.

With the uptake of advanced technologies and the rise in the number of passenger vehicles, the global automotive market is expected to reach $3.58 trillion by 2031, expanding at a CAGR of 3%.

Considering these conducive trends, let’s examine the fundamentals of the two stocks from the Auto & Vehicle Manufacturers industry, starting with the one ranked lower from the investment point of view.

Stock to Avoid:

NIO Inc. (NIO)

Headquartered in Shanghai, China, NIO designs, develops, manufactures, and sells smart electric vehicles in China. It offers five and six-seater electric SUVs, as well as smart electric sedans.

In terms of the trailing-12-month gross profit margin, NIO’s 5.46% is 84.7% lower than the 35.71% industry average. Likewise, its 0.54x trailing-12-month asset turnover ratio is 46.4% lower than the industry average of 1x.

For the second quarter ended June 30, 2023, NIO’s total revenues fell 14.8% year-over-year to RMB8.77 billion ($1.20 billion) while its adjusted loss from operations widened 132% year-over-year to RMB5.46 billion ($749.84 million). In addition, adjusted net loss attributable to ordinary shareholders of NIO widened 140.2% year-over-year to RMB5.45 billion ($748.47 million).

Furthermore, adjusted net loss per share attributable to ordinary shareholders widened 144.8% year-over-year to RMB3.28.

For the quarter that ended September 30, 2023, NIO’s EPS is expected to remain negative. It failed to surpass the consensus EPS estimates in each of the trailing four quarters. Over the past three months, the stock has declined 46.8% to close the last trading session at $7.89.

NIO’s grim prospects are reflected in its POWR Ratings. The stock has an overall F rating, which translates to a Strong Sell in our proprietary system. The POWR ratings assess stocks by 118 different factors, each with its own weighting.

It has an F grade for Stability and a D for Momentum, Sentiment, and Quality. It is ranked #47 out of 52 stocks in the Auto & Vehicle Manufacturers industry. To access NIO’s grades for Growth and Value, click here.

Stock to Buy:

Honda Motor Co., Ltd. (HMC)

Headquartered in Tokyo, Japan, HMC develops, manufactures, and distributes motorcycles, automobiles, power, and other products in Japan, North America, Europe, Asia, and internationally. It operates through four segments: Motorcycle Business; Automobile Business; Financial Services Business; and Power Product and Other Businesses.

On November 7, 2023, HMC at EICMA in Milan, announced its complete 24YM lineup, including four new models, substantial improvements to four others, and a concept version of their next electric vehicle for European customers. Notable highlights comprise the new CB1000 Hornet, the return of the CBR600RR, the new NX500, and enhancements to the CRF1100L Africa Twin models.

HMC presented the SC e: Concept, their second electric two-wheeler for European customers, slated for a 2025 release.

Additionally, HMC announced the development of the world's first Honda E-Clutch system for motorcycles, enabling smooth starting and gear shifting without the need for the rider to operate the clutch lever. It offers flexibility and will be implemented in HMC’s FUN motorcycle models in the future.

In terms of the trailing-12-month net income margin, HMC’s 4.89% is 13.8% higher than the 4.29% industry average. Likewise, its 13.12% trailing-12-month EBITDA margin is 20.2% higher than the industry average of 10.91%. Furthermore, the stock’s 8.42% trailing-12-month levered FCF margin is 63.8% higher than the industry average of 5.14%.

HMC’s sales revenue for the first quarter that ended June 30, 2023, increased 20.8% year-over-year to ¥4.62 trillion ($30.72 billion). The company’s operating profit increased 77.5% year-over-year to ¥394.45 billion ($2.62 billion). Its profit for the period increased 134.1% year-over-year to ¥382.95 billion ($2.55 billion). In addition, its EPS came in at ¥219.06, representing an increase of 151.1% year-over-year.

Analysts expect HMC’s revenue for the September 30, 2023 quarter to increase 14.5% year-over-year to $33.26 billion. Likewise, its EPS for fiscal 2024 is expected to increase 41.4% year-over-year to $4.04. The stock has gained 40.4% year-to-date to close the last trading session at $32.10.

It’s no surprise that HMC has an overall rating of A, which translates to a Strong Buy in our proprietary POWR Ratings system.

It has an A grade for Value and Sentiment and a B for Growth, Stability, and Quality. It is ranked first in the Auto & Vehicle Manufacturers industry. Beyond what we stated above, we also have given HMC grades for Momentum. Get all HMC ratings here.

What To Do Next?

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HMC shares were trading at $31.89 per share on Wednesday afternoon, down $0.21 (-0.65%). Year-to-date, HMC has gained 41.26%, versus a 15.28% rise in the benchmark S&P 500 index during the same period.

Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.

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