Despite macroeconomic concerns, auto sales are expected to increase due to pent-up demand and technological advancements. Therefore, it could be wise for investors to buy fundamentally sound auto stock Volkswagen AG (VWAGY) now. However, I think NIO Inc. (NIO) could be best avoided, given its weak financials.
In October, new vehicle sales in the United States hit 1,211,141 units, up 2% year-on-year, thanks to surging demand for electric vehicles (EVs) and the economic recovery.
According to Atlas Public Policy, electric vehicle sales in the United States are likely to reach a record 9% of all passenger vehicles in 2023. This will be an increase from 7.3% of new car sales in 2022. Government incentives and policies encouraging the use of electric vehicles have played an important part in pushing this growing trend.
The North American automotive market is estimated to be valued at $1.22 trillion by 2028, growing at a 5.4% CAGR. The market is expected to be influenced by rising electric mobility, government support, and consumer preference for safety and comfort features enabled by ADAS technologies.
However, the automotive industry is facing constant disruption due to the supply chain issues, reduced volumes, and rising interest rates. The shift towards electric vehicles and autonomous driving technology has intensified these challenges, impacting profitability and efficiency.
Stock to Buy:
Volkswagen AG (VWAGY)
Headquartered in Wolfsburg, Germany, VWAGY manufactures and sells automobiles primarily in Europe, North America, South America, and the Asia-Pacific region. The company has four segments: Commercial Vehicles; Power Engineering; Financial Services; and Passenger Cars and Light Commercial Vehicles.
VWAGY’s forward EV/EBITDA multiple of 6.34 is 34.2% lower than the industry average of 9.63. Its forward Price/Cash Flow multiple of 1.70% is 82.2% lower than the industry average of 9.57.
VWAGY’s trailing-12-month CAPEX / Sales of 4.67% is 48.6% higher than the industry average of 3.14%. Its trailing-12-month levered FCF margin of 117.7% is 32.8% higher than the industry of 5.18%.
During the third quarter that ended September 30, 2023, VWAGY’s sales revenue increased 11.6% year-over-year to €78.85 billion ($86 billion). Its operating result improved 14.9% from the year-ago quarter to €4.89 billion ($5.34 billion), and its earnings after tax amounted to €4.35 billion ($4.74 billion), up 103.6% year-over-year.
Analysts expect VWAGY’s revenue to increase 13.6% year-over-year to $340.52 billion for the year ending December 2023. Its EPS is expected to grow 74.5% year-over-year to $5.55 for the same period. The stock has gained 5.4% over the past month to close the last trading session at $12.71.
VWAGY’s POWR Ratings reflect this promising outlook. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
VWAGY also has an A grade for Value and a B for Growth, Sentiment and Stability. It is ranked #6 out of 51 stocks in the B-rated Auto & Vehicle Manufacturers industry. Click here for the additional POWR Ratings for Momentum and Quality for VWAGY.
Stock to Sell:
NIO Inc. (NIO)
Headquartered in Shanghai, China, NIO engages in the research, development, and manufacturing of premium smart electric vehicles. The company is mainly engaged in the design, development, manufacture, and sales of high-end smart electric vehicles.
NIO’s forward EV/Sales multiple of 1.62 is 38.7% higher than the industry average of 1.17. Its forward Price/Sales multiple of 1.54% is 84.7% higher than the industry average of 0.84.
NIO’s trailing-12-month EBITDA margin of negative 38.36% is compared with the industry average of 11.04%. Its trailing-12-month EBIT margin of negative 44.83% is compared with the industry average of 7.50%
In the second quarter that ended June 30, 2023, NIO’s total revenues decreased14.8% year-over-year to RMB8.77 billion ($1.23 billion) while its adjusted loss from operations increased 132% year-over-year to RMB5.46 billion ($763.67 million). In addition, its adjusted net loss attributable to ordinary shareholders of NIO grew 140.2% year-over-year to RMB5.45 billion ($761.09 million).
Street expects NIO’s EPS to decline 11.2% year-over-year to negative $1.44 for the year ending December 2023. Over past three months the stock has lost 30.8% to close the last trading session at $7.47.
NIO’s bleak fundamentals are reflected in its POWR Ratings. The stock has an overall rating of F, which equates to a Strong Sell in our proprietary rating system.
It is ranked #47 in the same industry. It has an F grade for Stability, Sentiment and Quality and a D for Momentum. To see additional NIO’s ratings for Growth and Value, click here.
What To Do Next?
Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:
VWAGY shares were trading at $13.00 per share on Friday morning, up $0.29 (+2.24%). Year-to-date, VWAGY has declined -13.60%, versus a 20.34% rise in the benchmark S&P 500 index during the same period.
About the Author: Rashmi Kumari
Rashmi is passionate about capital markets, wealth management, and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master's degree in commerce, she aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions.
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