The auto industry is expected to see stable growth this year. Moreover, the rapid adoption of electric vehicles should boost demand in the auto industry. Hence, I think quality auto stocks Stellantis N.V. (STLA) and General Motors Company (GM) could be ideal additions to your portfolio.
However, given the lingering macroeconomic headwinds, NIO Inc. (NIO) and XPeng Inc. (XPEV) could be best avoided, considering their fundamental weakness.
Vehicle production is recovering from two years of semiconductor shortages and supply chain issues. Despite inflation and rising interest rates, the industry is expected to grow by over one million vehicles to about 15 million units in 2023. The global automotive market is expected to grow at a CAGR of 3% until 2028.
Moreover, the automobile industry is pouring more than $1 trillion into a revolutionary shift from combustion engines to electric vehicles guided by software. Also, the introduction of the Inflation Reduction Act is expected to support the EV market growth in the US. The global EV industry is expected to reach $823.74 billion by 2030, growing at a CAGR of 18.2%.
However, high-interest rates, supply chain problems, and recessionary fears continue to impact the industry. Moreover, high prices of vehicles could also dampen the demand.
Stocks to Buy:
Stellantis N.V. (STLA)
Based in Hoofddorp, Netherlands, STLA engages in the design, engineering, manufacturing, distribution, and sale of automobiles and light commercial vehicles, engines, transmission systems, metallurgical products, mobility services, and production systems worldwide.
On February 28, STLA announced that it will invest a total of $155 million in three Kokomo, Indiana, plants to produce new electric drive modules that will help power future electric vehicles assembled in North America and support the goal of 50% battery electric sales in the U.S. by 2030.
STLA’s forward EV/Sales of 0.15x are 86.1% lower than the industry average of 1.11x. Its forward P/S multiple of 0.27 is 68% lower than the industry average of 0.85.
On February 22, 2023, STLA announced a quarterly dividend of $1.42 per share, payable on May 4, 2023.
STLA pays $1.43 annually as dividends. This translates to a yield of 8.40% at the current price, compared to the 4-year average dividend yield of 10.79%. Its dividend payments have grown at a CAGR of 17.3% over the past three years.
During the year ended December 31, 2022, STLA’s net revenues increased 20.2% year-over-year to €179.59 billion ($193.02 billion). Its net profit increased 18.1% year-over-year to €16.78 billion ($18.03 billion), whereas its EPS increased 17.7% year-over-year to €5.31.
STLA’s revenue is expected to increase 9.3% year-over-year to $47.82 billion during the current fiscal quarter ending March 2023. Additionally, it has topped consensus revenue estimates in three of the trailing four quarters.
The stock has gained 34% over the past six months to close the last trading session at $17.42.
STLA’s POWR Ratings reflect this promising outlook. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary ratings system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade in Sentiment and Value and a B for Quality and Stability. The stock is ranked first in the 58-stock Auto & Vehicle Manufacturers industry. Click here to see the POWR Ratings of STLA (Growth and Momentum).
General Motors Company (GM)
GM designs, builds, and sells trucks, crossovers, cars, and automobile parts; and provide software-enabled services and subscriptions worldwide. The company operates through GM North America; GM International; Cruise, and GM Financial segments.
On February 21, GM’s subsidiary GM Defense LLC, and the Tawazun Council, a UAE government entity that supports defense and security investments and promotes innovation and R&D in the defense industries, signed a collaborative Memorandum of Understanding as the first step toward a formal partnership to develop future products in the areas of advanced mobility and power solutions.
GM Defense will leverage the commercial technologies of its parent company, GM, and the battery electric investments made by GM to bring innovation to global defense and government customers.
On February 9, GM and GlobalFoundries(GFS) announced a strategic, long-term agreement establishing a dedicated capacity corridor exclusively for GM’s chip supply. Through this first-of-its-kind agreement, GF will manufacture for GM’s key chip suppliers at GF’s advanced semiconductor facility in upstate New York, bringing a critical process to the U.S.
GM’s forward EV/Sales of 0.93x are 22.7% lower than the industry average of 1.20x. Its forward Price/Sales multiple of 0.35 is 61.8% lower than the industry average of 0.93. its forward EV/EBITDA of 7.06x is 30.1% lower than the industry average of 10.10x.
GM pays $0.36 annually as dividends. This translates to a yield of 1.07% at the current price, compared to the 4-year average dividend yield of 1.94%.
GM’s revenue increased 28.4% year-over-year to $43.11 billion for the fiscal fourth quarter that ended December 31, 2022. The company’s adjusted EBIT increased 33.8% year-over-year to $3.80 billion. Its net income attributable to shareholders increased 14.8% from the year-ago period to $2 billion, while its adjusted EPS rose 57% from the prior-year quarter to $2.12.
Street expects GM’s revenue to grow 8.7% year-over-year to $39.12 billion in the current fiscal quarter (ending March 2023). Its EPS for the same quarter is expected to be $1.66. Additionally, it has topped consensus EPS estimates in three of the trailing four quarters.
The stock has gained 4.3% year-to-date to close its last trading session at $35.10.
It’s no surprise that GM has an overall rating of B, which translates to a Buy in our POWR Ratings system.
GM also has a B grade for Growth, Value, and Sentiment. It is ranked #17 in the same industry.
For additional ratings for GM for Quality, Momentum, and Stability, click here.
Stocks to Avoid:
NIO Inc. (NIO)
Headquartered in Shanghai, China, NIO designs, develops, manufactures, and sells smart electric vehicles in China. It offers five, six, and seven-seater electric SUVs, as well as smart electric sedans.
NIO’s forward Price/Sales of 1.24x is 43.5% higher than the industry average of 0.87x. Its forward Price/Book multiple of 7.02 is 178.9% higher than the industry average of 2.52.
During the fiscal fourth quarter that ended December 31, 2022, NIO’s gross profit decreased 63.4% year-over-year to RMB621.76 million ($90.34 million). Non-GAAP net loss attributable to ordinary shareholders of NIO widened 194.6% year-over-year to RMB5.05 billion ($0.73 billion), while its non-GAAP net loss per share attributable to ordinary shareholders increased 186.9% year-over-year to RMB 3.07.
NIO’s EPS is expected to decline 91.4% year-over-year to negative $0.32 in the current fiscal quarter ending March 2023. Its revenue is expected to come in at $1.70 billion for the same quarter. Also, the stock has failed to surpass the EPS estimates in each of the trailing four quarters, which is disappointing
The stock has plunged 59.1% over the past nine months to close the last trading session at $9.27.
It is no surprise that NIO has an overall rating of F, which translates to a Strong Sell in our POWR Ratings system.
NIO also has an F grade for Stability and Sentiment and a D for Growth and Quality. It is ranked #51 in the same industry.
To access the POWR Ratings of NIO (Value and Momentum), Click here.
XPeng Inc. (XPEV)
Headquartered in Guangzhou, the People's Republic of China, XPEV designs, develops, manufactures, and markets smart electric vehicles in the People's Republic of China. It offers SUVs under the G3 and G3i names; four-door sports sedans under the P7 name; and family sedans under the P5 name.
XPEV’s forward Price/Sales of 1.57x is 82% higher than the industry average of 0.87x.
During the fourth quarter that ended December 31, 2022, XPEV’s vehicle sales decreased 43.1% year-over-year to RMB4.66 billion ($675.81 million). The company’s non-GAAP net loss increased 84.2% year-over-year to RMB2.21 billion ($320.77 million), and non-GAAP net loss per ordinary share increased 84.3% year-over-year to RMB1.29.
Analysts expect XPEV’s EPS to decline 4.7% year-over-year to negative $0.28 for the current fiscal quarter ending March 2023. Its revenue is expected to decline 30.7% year-over-year to $777.09 million for the same quarter.
The stock has declined 67.1% over the past nine months to close its last trading session at $9.91.
XPEV’s bleak outlook is reflected in its POWR Ratings. The stock has an overall rating of F, translating to a Strong Sell in our POWR Rating system.
XPEV is also graded an F in Sentiment and Stability and a D in Quality. It is ranked #49 in the same industry.
In addition to the POWR Rating grades we’ve stated above, XPEV’s rating for Value, Momentum, and Growth can be seen here.
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STLA shares were trading at $17.50 per share on Wednesday afternoon, up $0.08 (+0.46%). Year-to-date, STLA has gained 23.24%, versus a 4.68% rise in the benchmark S&P 500 index during the same period.
About the Author: Nidhi Agarwal
Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.
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