Headquartered in Tokyo, Japan, Honda Motor Co., Ltd. (HMC) develops, manufactures, and distributes motorcycles, automobiles, power products, and other products internationally. It operates through four segments: Motorcycle Business; Automobile Business; Financial Services Business; and Life creation and Other Businesses. In comparison, Ford Motor Company (F) in Dearborn, Mich., designs, manufactures, markets, and services a range of Ford trucks, cars, sport utility vehicles, electrified vehicles, and Lincoln luxury vehicles worldwide. It operates through three segments: Automotive; Mobility; and Ford Credit.

Even though a global semiconductor supply crunch has negatively impacted the auto manufacturing industry, massive government and private investments to boost semiconductor production should gradually redress the situation. Moreover, traditional automakers might be the biggest beneficiaries based on their broad portfolio of vehicles and market dominance. According to a report by Market Research Future, the automotive industry is expected to grow at a 4.5% CAGR between 2021 - 2028. Therefore, both HMC and F should benefit.

F’s shares have gained 59.7% in price over the past nine months, while HMC has returned 12.4%. Also, F’s 78.6% gains year-to-date are significantly higher than HMC’s 9%. Moreover, F is the clear winner with 28.3% gains versus HMC’s 0.6% returns in terms of the past six months’ performance.

Click here to check out our Automotive Industry Report for 2021

But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On September 30, 2021, HMC introduced the technology development direction it plans to pursue. The company is taking on new areas while leveraging its core technologies. This direction should contribute to the fulfillment of HMC’s 2030 vision of serving people worldwide with the "joy of expanding their life's potential."

On September 27, 2021, F announced plans to bring electric vehicles (EVs) at scale to American customers with two new massive, environmentally and technologically advanced campuses in Tennessee and Kentucky. The campuses are expected to produce the next generation of electric F-Series trucks and the batteries to power future electric Ford and Lincoln vehicles. This initiative has the potential to increase the company’s sales.

Recent Financial Results

HMC’s sales revenue increased 68.7% year-over-year to 3,583.80 billion yen ($31.36 billion) for its fiscal first quarter, ended June 30, 2021. The company’s operating profit came in at 243.20 billion yen ($2.13 billion) compared to an113.60 billion yen ($994.01 million) loss in the prior-year quarter. Also, its profit for the period was 222.50 billion yen ($1.95 billion) compared to an 80.80 billion yen ($707.01 million) loss in the year-ago period.

F’s revenues increased 38% year-over-year to $26.75 billion for its fiscal second quarter, ended June 30, 2021. The company’s adjusted EBIT was $1.08 billion, compared to a $1.95 billion loss in the prior-year quarter. Also, its adjusted EPS came in at $0.13 compared to a loss per share of $0.35 in the year-ago period.

Expected Financial Performance

Analysts expect HMC’s revenue to increase 373.2% in the current year and 8.9% next year. The company’s EPS is expected to grow 7.6% in the current year and 24.8% next year. Moreover, its EPS is expected to grow at a 11.7% rate per annum over the next five years.

In comparison F’s revenue is expected to increase 9.9% in the current year and 18.9% next year. Its EPS is expected to grow 285.4% in the current year and 18.4% next year. Also, the company’s EPS is expected to grow at a 72.1% rate per annum over the next five years.

Profitability

F’s $136.43 billion trailing-12-month revenue is higher than HMC’s $131.71 billion. However, HMC is more profitable, with gross profit and net income margins of 21.28% and 6.57%, respectively, compared to F’s 10.27% and 2.51%.

Also, HMC’s ROE, ROA, and ROTC of 11.42%, 3.02%, and 3.84%, respectively,  are higher than F’s 10.40%, 1.10%, and 1.46%.

Valuation

In terms of forward EV/S, F is currently trading at 1.45x, which is 98.6% higher than HMC’s 0.73x. Moreover, F’s 15.46x forward EV/EBITDA ratio is 74.9% higher than HMC’s 8.84x.

So, HMC is relatively affordable here.

POWR Ratings

HMC has an overall B rating, which equates to a Buy in our proprietary POWR Ratings system. In contrast, F has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

HMC has an A grade for Value. This is justified given its 0.63x forward P/B, which is 80.2% lower than the 3.16x industry average. In comparison, F has a Value grade of B.

In addition, HMC has a B grade for Stability, which is consistent with its 0.95 beta However, F has a D grade for Stability, which is consistent with its 1.05 beta.

Of the 63 stocks in the Auto & Vehicle Manufacturers industry, HMC is ranked #7, while F is ranked #27.

Beyond what I’ve stated above, we have also rated the stocks for Growth, Sentiment, Momentum, and Quality. Click here to view all the HMC ratings. Also, get all the F ratings here.

The Winner

The auto manufacturing industry is expected to grow exponentially with increasing demand for zero-emission vehicles. While both HMC and F are expected to gain eventually, we think it is better to bet on HMC now because of its lower valuation and higher profitability.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Auto & Vehicle Manufacturers industry here.

Click here to check out our Automotive Industry Report for 2021

HMC shares were trading at $30.53 per share on Tuesday afternoon, down $0.18 (-0.59%). Year-to-date, HMC has gained 9.48%, versus a 21.59% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

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