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NIO (NIO), Honda Motor (HMC) or Li Auto (LI): Which Is the Better Buy?

The auto and vehicle manufacturer industry is poised for considerable growth amid technological progress, increasing demand for new vehicles, and a rapid transition to EVs. Given the industry tailwinds, let’s find out which auto stock among Honda Motor Co., Ltd. (HMC), Li Auto Inc. (LI), and NIO Inc. (NIO) could be a better buy now. Keep reading…

Thanks to improving inventory levels, easing inflation, and resilient consumer demand, several automakers experienced year-over-year sales growth in the second quarter of 2023. Moreover, with the growing shift toward Electric Vehicles (EVs) and technology integration in the auto manufacturing processes, the industry’s overall outlook seems bright.

Against this backdrop, I have evaluated the fundamentals of three auto stocks, namely, Honda Motor Co., Ltd. (HMC), Li Auto Inc. (LI), and NIO Inc. (NIO), to help you determine which could be a better buy now.

So far this year, consumer demand has demonstrated greater resilience as opposed to an anticipated potential deceleration in the U.S. car market amid inflationary pressure and increased borrowing expenses.

U.S. vehicle sales remained solid in July. With supply holding at healthy levels, U.S. new-vehicle market spurred a notable year-over-year sales improvement in July. Per Cox Automotive, new-vehicle sales volume likely reached nearly 1.30 million units, indicating an increase of more than 15% year-over-year.

In addition, the rising popularity of EVs has led to a transformation in the automotive industry, bolstering the revenues of automakers. EV sales in the United States have surged 48.4% year-over-year, with 300,000 new EVs sold in the second quarter of 2023.

EV sales are projected to continue their strong momentum, with new purchases accelerating in the second half of this year. By the end of 2023, around 14 million electric car sales are expected, representing a 35% year-over-year increase.

Given the robust demand, it is no surprise that the overall EV market is projected to reach around $1.72 trillion by 2032, growing at a CAGR of 23.1%. Moreover, with electronics and digital devices becoming ubiquitous, the auto parts market is expected to reach $755 billion by 2026, growing at a CAGR of 7.5%.

In the above context, let’s take a closer look at the featured stocks.

Stock to Buy:

Honda Motor Co., Ltd. (HMC)

Headquartered in Tokyo, Japan, HMC is engaged in producing and selling motorcycles, automobiles, and power products. It also sells spare parts and provides after-sales services directly through retail dealers, independent distributors, and licensees. The company operates through four business segments: Motorcycle; Automobile; Financial service; and Life creation.

On July 26, HMC revealed that seven major global automakers, including itself, had united to create an unprecedented new charging network joint venture that is expected to expand access to high-powered charging in North America significantly.

While this partnership focuses on elevating the customer experience, it should help HMC expand its reach across the United States and Canada; and strengthen its position in the EV market. 

In the same month, the company signed a basic agreement on a software development partnership with SCSK Corporation, a Japan-based IT solution and service provider. Through this partnership, both companies would combine their strengths to develop highly competitive, next-generation, software-defined mobility products and services.

Given the evolving technology trends, this should help HMC enhance its product offerings with seamless and speedy software development.

In terms of forward EV/Sales, HMC is trading at 0.62x, 47.9% lower than the industry average of 1.19x. Its forward EV/EBITDA multiple of 6.66 is 31.3% lower than the industry average of 9.70x. In addition, HMC’s forward Price/Sales ratio of 0.38 is 57.1% lower than the industry average of 0.87.

During the first quarter that ended on June 30, 2023, HMC’s sales revenue increased 20.8% year-over-year to ¥4.62 trillion ($31.72 billion). Its operating profit amounted to ¥394.45 billion ($2.71 billion), representing a 77.5% increase from the prior-year quarter. HMC’s profit for the year improved 134.1% year-over-year to ¥382.95 billion ($2.63 billion).

Also, its EPS came in at ¥219.06, up 151.1% from its year-ago period. In addition, its cash and cash equivalents increased 12.5% year-over-year to ¥4.08 trillion ($28.01 billion) at the end of the period.

Street expects HMC’s revenue to increase 17.3% year-over-year in the second quarter (ending September 30, 2023) to $34.06 billion. Its EPS is expected to increase by 13.2% per annum over the next five years.

In addition, its trailing-12-month EBITDA and levered FCF margins of 13.12% and 8.42% are 22.2% and 77.7% higher than the 10.74% and 4.74% industry averages. Likewise, its trailing-12-month net income margin of 4.89% is 17% higher than the industry average of 4.18%.

The stock has gained 32.1% year-to-date to close the last trading session at $30.20.

HMC’s strong fundamentals are reflected in its POWR Ratings. The stock 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.

It has an A grade for Value and Stability and a B for Growth, Sentiment, and Quality. Among the 55 stocks in the Auto & Vehicle Manufacturers industry, it is ranked first. Click here to see HMC’s ratings for Momentum.

Stock to Watch:

Li Auto Inc. (LI)

LI is a China-based new energy passenger vehicles automaker principally engaged in designing, developing, manufacturing, and selling smart electric vehicles. The company’s primary products are Sport Utility Vehicles (SUVs) under its Li ONE brand. It also sells peripheral products and provides related services, such as charging stalls, vehicle internet connection services, and extended lifetime warranties.

On August 3, LI launched the Pro trim of Li L9 to cater to a wider range of family users. Li L9 Pro comes standard with the Li AD Pro autonomous driving system powered by a Horizon Robotics Journey 5 chip and the SS Max+ smart space system.

On August 1, the company reported that it delivered 34,134 vehicles in July 2023, representing an increase of 227.5% year-over-year and surpassing the 30,000 mark for the second consecutive month. The cumulative deliveries of LI’s vehicles in 2023 reached 173,251 by the end of July.

Further, as of July 31, 2023, the company had 337 retail stores covering 128 cities, in addition to 323 servicing centers and Li Auto-authorized body and paint shops operating in 222 cities.

In terms of forward non-GAAP PEG, LI is trading at 0.13x, 91.4% lower than the industry average of 1.48x. However, its forward EV/Sales multiple of 1.98 is 66.8% higher than the industry average of 1.19x.

LI’s total revenues increased 228.1% year-over-year to RMB28.65 billion ($3.93 billion) in the second quarter that ended June 30, 2023, while its gross profit rose 232% from the prior-year period to RMB6.24 billion ($855.27 million).

Its non-GAAP income from operations and net income amounted to RMB2.04 billion ($280.27 million) and RMB2.73 billion ($374.12 million) versus a non-GAAP loss from operations and net loss of RMB520.80 million ($71.44 million) and RMB183.40 million ($25.16 million), respectively. The company’s non-GAAP free cash flow increased significantly from the prior-year quarter to RMB9.62 billion ($1.32 billion).

The consensus revenue estimate of $4.94 billion for the fourth quarter (ending December 31, 2023) represents a 94.3% increase year-over-year. The consensus EPS estimate of $0.34 for the next year indicates a 151.7% improvement year-over-year. The company has an impressive earnings surprise history, surpassing the consensus EPS estimates in three of the trailing four quarters.

Over the past three years, its revenue and total assets have improved at CAGRs of 263.4% and 115.8%, respectively.

In addition, the stock’s trailing-12-month levered FCF margin of 23.51% is 396.3% higher than the 4.74% industry average. However, its trailing-12-month net income margin and ROCE of 2.47% and 4.03% are 40.8% and 60.9% lower than the industry averages of 4.18% and 10.32%, respectively.

Shares of LI have gained 126.8% over the past nine months and 97.6% year-to-date to close the last trading session at $40.30.

LI’s POWR Ratings reflect this promising outlook. It has an A grade for Growth and a B for Sentiment. Within the same industry, it is ranked #30. To see LI’s ratings for Value, Momentum, Stability, and Quality, click here.

Stock to Avoid:

NIO Inc. (NIO)

Headquartered in Shanghai, China, NIO produces and markets high-end smart electric vehicles. It provides power solutions, battery swapping services, rapid charging, vehicle internet assistance, and extended lifetime warranties.

In terms of forward EV/Sales and Price/Sales, NIO is trading at 2.29x and 2.30x, which are 92.9% and 163.1% higher than the industry averages of 1.19x and 0.87x, respectively. Likewise, its forward Price/Book multiple of 10.16 compares to the industry average of 2.55x.

Also, the stock’s trailing-12-month net income margin, ROCE, and ROTC of negative 35.05%, 65.49%, and 20.77% compare to the industry averages of 4.18%, 10.32%, and 5.99%, respectively.

For the fiscal quarter that ended March 31, 2023, NIO’s gross profit decreased 88.8% year-over-year to RMB162.29 million ($22.26 million). Its adjusted loss from operations widened 163.6% year-over-year to RMB4.52 billion ($620.33 million).

Its non-GAAP net loss came in at RMB4.15 billion ($569.26 million), widening 216.9% from the prior-year quarter. In addition, its non-GAAP loss per share stood at RMB2.51, up 217.7% year-over-year.

Analysts expect NIO’s revenue for the fiscal second quarter (ended June 30, 2023) to decrease 14.2% year-over-year to $1.27 billion. Its earnings per share is expected to remain negative in the fiscal year 2023. Moreover, it missed the consensus EPS estimates in each of the trailing four quarters.

Over the past year, the stock has declined 45.5% to close the last trading session at $11.40.

NIO’s weak fundamentals are reflected in its POWR Ratings. The stock has an overall F rating, equating to a Strong Sell in our proprietary rating system.

It has an F grade for Stability and Quality and a D for Growth, Value, and Sentiment. Out of 55 stocks in the same industry, it is ranked #53. Click here to see NIO’s rating for Momentum.

What To Do Next?

Get your hands on this special report with 3 low priced companies with tremendous upside potential even in today’s volatile markets:

3 Stocks to DOUBLE This Year >

HMC shares were trading at $30.26 per share on Thursday afternoon, up $0.06 (+0.20%). Year-to-date, HMC has gained 34.04%, versus a 15.48% rise in the benchmark S&P 500 index during the same period.

About the Author: Shweta Kumari

Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.


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