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Ranking 3 Auto Stocks for September: Buy, Hold or Sell?

Robust consumer demand and the widespread adoption of technology are boosting the auto industry’s prospects. However, given the macroeconomic uncertainties, let us analyze leading auto stocks NIO (NIO), Li Auto (LI), and Honda Motor (HMC) to identify whether they are Buy, Hold, or Sell in September. Read on…

Despite rising fuel prices, new vehicle sales in the United States are projected to increase in August, driven by better supply conditions and high demand for personal transportation. Moreover, electric vehicles are in demand due to environmental concerns and government incentives.

However, I think it might be best for investors to avoid NIO Inc. (NIO), given its weak financials. While holding Li Auto Inc. (LI) could be wise, one could consider investing in Honda Motor Co., Ltd. (HMC).

A report by J.D. Power and GlobalData anticipates total U.S. new vehicle sales, including retail and non-retail transactions, to reach approximately 1,354,600 units in August, marking a 15.4% increase compared to the year-ago period.

Moreover, as per reports, this year’s global auto sales are expected to reach 86.80 million units compared with the previous estimate of 86.40 million units, amid an ongoing improvement in supply chains.

In addition, the automotive market is expanding as electric cars and autonomous vehicles gain popularity. The U.S. is now actively embracing electric vehicle (EV) adoption. All 50 states are working on establishing a nationwide EV charging infrastructure network funded by the Infrastructure Investment and Jobs Act (IIJA).

The global automotive market is expected to reach $28.70 billion in 2030, growing at a CAGR of 4.5%.

However, high inflation has led to higher vehicle prices, making it harder for consumers and businesses to finance new cars or commercial vehicles. With central banks raising interest rates in response to inflation, vehicle financing is expected to remain expensive until at least 2024.

Furthermore, the escalating fuel prices are expected to affect automakers' sales, and this trend is expected to persist throughout the year, potentially casting a shadow over the outlook for the automotive industry.

With these trends in mind, let's delve into the fundamentals of the three Auto & Vehicle Manufacturers stocks, starting with number 3.

Stock to Sell:

NIO Inc. (NIO)

Headquartered in Shanghai, China, NIO designs, manufactures, and sells smart electric vehicles. It offers both smart electric sedans and electric SUVs with multiple seating options. The company also designs, develops, and produces e-powertrains, battery packs, and components.

NIO’s trailing-12-month negative EBITDA and levered FCF margins of 30.74% and 1.67% are lower than their respective industry averages of 10.83% and 4.97%.

On July 12, 2023, NIO announced the closure of a significant equity investment of $738.50 million from CYVN Investments RSC Ltd, an affiliate of CYVN Holdings L.L.C., which is primarily owned by the Abu Dhabi Government and focuses on advanced mobility.

Additionally, CYVN Entities acquired Class A ordinary shares worth $350 million from Tencent's affiliate. As a result, CYVN Investments RSC Ltd now holds around 7.0% of NIO's total outstanding shares.

During the fiscal second quarter that ended June 30, 2023, NIO’s total revenue decreased 14.8% year-over-year to RMB8.77 billion ($1.20 billion). Its gross profit declined 93.5% from the year-ago quarter to RMB87 million ($11.95 million).

Additionally, its adjusted net loss increased by 140.2% from the previous year’s quarter to RMB5.45 billion ($748.75 million), and loss from operations rose 113.5% year-over-year to RMB6.07 billion ($833.93 million).

Analysts expect NIO’s EPS to amount to a negative $0.22 for the fiscal third quarter that ended September 2023. Also, the company failed to surpass the consensus EPS estimates in each trailing four quarters, which is disappointing.

Shares of NIO have slumped 45.3% over the past year to close the last trading session at $10.89. It has a 24-month beta of 1.40.

NIO’s POWR Ratings reflect its bleak outlook. The stock has an overall rating of F, equating to a Strong Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

The stock has an F grade for Quality and Stability and a D for Growth and Value. Within the 58-stock Auto & Vehicle Manufacturers industry, it ranks #53.

In addition to the POWR Ratings highlighted above, one can access NIO’s ratings for Momentum and Sentiment here.

Stock to Hold:

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.

While LI’s trailing-12-month levered FCF margin of 23.51% is 373.2% higher than the 4.97% industry average, its trailing-12-month EBITDA margin of 1.81% is 83.3% lower than the industry average of 4.97%.

On August 3, LI launched the Pro trim of Li L9 to cater to a broader 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.

LI’s total revenues increased 228.1% year-over-year to RMB28.65 billion ($3.94 billion) in the second quarter that ended June 30, 2023. Its gross profit rose 232% from the prior-year quarter to RMB6.24 billion ($857.28 million). However, its selling, general and administrative expenses increased 74.3% year-over-year to RMB2.31 billion ($317.36 million).

Moreover, its non-GAAP net income amounted to RMB2.73 billion ($375.06 million) compared to a non-GAAP net loss of RMB183.40 million ($25.19 million), respectively.

LI’s EPS is expected to rise significantly year-over-year to $1.03 billion in the fiscal year 2023. Its revenue for the current year is likely to grow 146% from the previous year to $16.04 billion. The company has an impressive earnings surprise history, surpassing the consensus EPS estimates in three of the trailing four quarters.

Shares of LI have gained 110.3% year-to-date to close the last trading session at $42.91. Its 24-month beta is 0.87.

LI’s POWR Ratings reflect this mixed outlook. The stock has an overall rating of C, translating to a Neutral in our proprietary rating system.

It has a C grade for Momentum and Quality. Within the Auto & Vehicle Manufacturers industry, it is ranked #30.

To access LI’s ratings for Value, Momentum, Stability, and Quality, click here.

Stock to Buy:

Honda Motor Co., Ltd. (HMC)

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

HMC’s trailing-12-month EBITDA and levered FCF margins of 13.12% and 8.42% are 21.2% and 69.5% higher than their respective industry averages of 10.83% and 4.97%.

On August 2, HMC announced the acquisition of 6914700 shares of its common stock for YEN29.99 billion ($4.12 billion).

Its annual dividend of $0.86 yields 2.70% on prevailing prices. The stock has a four-year average dividend rate of 3.35%. Over the past three years, HMC registered a CAGR of 4.1% dividend growth.

HMC’s sales revenue for the first quarter ended June 30, 2022, increased 20.8% year-over-year to ¥4.62 trillion ($31.57 billion). The company’s operating profit increased 77.5% year-over-year to ¥394.45 billion ($2.70 billion). Its profit for the period increased 134.1% year-over-year to ¥382.95 billion ($2.62 billion), while its EPS attributable to owners of the parent increased 151.1% from the prior-year quarter to ¥219.06.

Street expects HMC’s revenue for the current fiscal year ending March 2024 to increase 397% year-over-year to $132.47 billion. Its EPS for the current year is expected to rise 19.2% year-over-year to $3.77.

The stock has gained 39.4% year-to-date to close the last trading session at $31.86. Its 24-month beta is 0.46.

HMC’s POWR Ratings reflect robust prospects. The stock has an overall rating of A, translating to a Strong Buy in our proprietary rating system.

It has an A grade for Value and Stability and a B for Sentiment, Growth, and Quality. It is ranked #5 in the same industry.

Click here to see HMC’s rating for Momentum.

What To Do Next?

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HMC shares were trading at $31.95 per share on Wednesday morning, up $0.09 (+0.28%). Year-to-date, HMC has gained 41.53%, versus a 18.76% rise in the benchmark S&P 500 index during the same period.

About the Author: Kritika Sarmah

Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.


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