The automobile industry was one of the hardest hit sectors amid the COVID-19 pandemic last year, with global automotive production declining 16% in 2020. The president of the International Organization of Motor Vehicle Manufacturers (OICA) stated that the COVID-19 pandemic had been “the worst crisis ever to impact the automotive industry,” wiping off all progress made over the last 10 years. Automobile production in the United States declined by 19% in 2020.
However, because major economies are recovering at a faster-than-expected pace, the automotive industry is expected to regain traction in the near term. Furthermore, production obstructions related to a global semiconductor chip shortage are expected to decline in the second half of this year, with significant government support. Retail sales of new vehicles are expected to be 34% higher year-over-year for May 2021.
Given the solid growth prospects of the automobile industry, we think it could be wise to bet on Honda Motor Co., Ltd. (HMC) and Thor Industries, Inc. (THO). These names hold immense growth potential but are trading at valuations that are lower than their peers’.
Honda Motor Co., Ltd. (HMC)
Headquartered in Japan, HMC is a renowned manufacturer and seller of motorcycles, automobiles, power products, among products in the global market. The company operates primarily through four segments: its motorcycle business, automobile business, financial services business, and life creation and other Businesses.
On June 8, HMC launched its eGX electrified DC power unit, which has applications in commercial-grade OEM equipment. The company has also launched several new and upgraded vehicles over the past month, including its Type R Honda Civic, 2021 Acura TLX Type S, and two off-road power sports bikes. These product launches should allow HMC to strengthen its global market reach and customer base.
HMC’s tangible book value improved at a 2% CAGR over the past three years, while its total assets increased at a 4.3% CAGR over this period. Its EPS improved 46.4% year-over-year.
HMC’s sales revenue increased 4.8% year-over-year to ¥3.62 trillion ($33.10 billion) in its fiscal fourth quarter, ended March 31. The company’s operating income stood at ¥213.20 billion ($1.95 billion), up 3,907.1% from the same period last year. HMC sold 680,388 American Hondas in May, representing a 42.5% improvement year-over-year.
Given that HMC is a prominent player in the industry with immense market reach, the stock is significantly undervalued. In terms of forward P/E, HMC is currently trading at 11.13x, 40.8% lower than the 18.79x industry average. Its 0.42 forward Price/Sales multiple is 69.6% lower than the 1.37 industry average.
HMC gained 17% over the past year to close yesterday’s trading session at $32.87. The stock has gained 16.4% year-to-date.
HMC has an overall A rating, which equates to Strong Buy in our proprietary POWR Rating system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
HMC has an A grade for Value, and B for Growth, Stability, Momentum and Sentiment. It is ranked #1 of 57 stocks in the Auto & Vehicle Manufacturers industry.
Beyond what we’ve stated above, we have also rated HMC for other components as well. Click here to view all HMC Ratings.
(Note that HMC is one of the few stocks handpicked by our Chief Value Strategist, David Cohne, currently in the POWR Value portfolio. Learn more here.)
Click here to check out our Automotive Industry Report for 2021
Thor Industries, Inc. (THO)
THO offers a wide range of recreational vehicles (RVs) and related parts. It distributes its products mainly in the United States, Canada and Europe. The company operates through three segments: towable recreational vehicles, heartland recreational vehicles and motorized recreational vehicles.
THO has committed to generate sustainable RVs to mitigate Scope 1 and Scope 2 carbon emissions by 50% by 2030 and achieve carbon neutrality by 2050. The company recently invested $1.23 million toward this cause. This should allow THO to become one of the world’s biggest environment-friendly RV manufacturers over time.
The company has an impressive growth history. THO’s revenues have increased at a 4.4% CAGR over the past three years, while its total assets increased at a 33% CAGR over the past three years. Its EPS improved 89.2% year-over-year.
THO’s net sales came in at $3.46 billion in its fiscal third quarter, ended April 30, indicating a 105.7% rise from the same period last year. Its net income grew 702% from its year-ago value to $182.72 million.
A $ 3.27 billion consensus revenue estimate for its fiscal second quarter, ending July 2021, represents a 40.5% improvement from the same period last year. Analysts expect the company’s EPS to come in at $ 2.88 in the current quarter, indicating a 34.6% rise year-over-year. Also, THO surpassed the Street’s EPS estimates in each of the trailing four quarters.
Given THO’s earnings and growth potential, its current price level indicates undervaluation. In terms of non-GAAP forward P/E, THO is currently trading at 11.68x, which is 33.3% lower than the 17.49x industry average. In terms of non-GAAP forward PEG, THO is trading at 1.30x which is 5.3% lower than the 1.37 industry average.
THO gained 20.8% over the past six months to close yesterday’s trading session at $115.60. The stock has gained 24.3% year-to-date.
THO has an overall B rating, which equates to Buy in our proprietary rating system. THO has an A grade for Growth, and a B for Value and Momentum. It is ranked #19 in the Auto & Vehicle Manufacturers industry.
Click here to view additional POWR Ratings for Stability, Quality and Sentiment.
Click here to check out our Automotive Industry Report for 2021
(Recently the Reitmeister Total Return Portfolio (RTR) closed a winning trade in THO for a 55% gain. Learn more about the RTR service here.)
HMC shares were trading at $32.83 per share on Wednesday afternoon, down $0.04 (-0.12%). Year-to-date, HMC has gained 17.74%, versus a 13.22% rise in the benchmark S&P 500 index during the same period.
About the Author: Subhasree Kar
Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.
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