After facing several challenges over the past few years, the auto industry has shown resilience amid the uncertain macroeconomic environment due to robust demand, easing inflation and supply chain constraints. Despite the high borrowing rates, auto sales will likely remain healthy this year.
In this piece, I have discussed the reasons why Polaris Inc. (PII), Suzuki Motor Corporation (SZKMY), and Isuzu Motors Limited (ISUZY) are generating better returns than Tesla, Inc. (TSLA) and are solid portfolio additions now.
Before diving deeper into these stocks, let’s discuss what’s keeping TSLA behind and what’s happening in the auto space.
Sales of new vehicles last year dropped to their lowest level since 2011. The decline in sales was caused by the challenges posed by high inflation, rising interest rates, and supply chain constraints. However, new vehicle sales have increased this year as more vehicles become available and inflation eased considerably.
Furthermore, the auto industry benefits from the growing adoption of battery electric vehicles (BEVs). Due to favorable government initiatives, rapidly spreading public charging infrastructure, and price cuts, BEVs are commanding huge demand.
Global auto sales are expected to surpass the previous estimates to reach 86.80 million units in 2023, and global light-vehicle sales are projected to reach 90.2 million units in 2024, driven by improved supply chains and robust demand.
EV pioneer TSLA reported lower deliveries and production for the third quarter. Due to planned downtimes for factory updates, the company’s third-quarter production stood at 430,488 units, while its total deliveries came in at 435,059 units, lower than the Wall Street estimates of 461,640. However, the company has maintained its 2023 volume target of around 1.8 million vehicles.
The automaker is expected to release its third-quarter results on October 18. Its EPS is expected to decline 29.2% year-over-year to $0.74. However, its revenue is expected to rise 12.9% year-over-year to $24.22 billion. The decline in earnings is expected due to the price cuts it undertook and slower sales in China. The company is expected to launch its much-awaited Cybertruck by the end of the year.
Analysts expect a fourth-quarter rebound in deliveries with the revamped Model 3 in China and the launch of the Cybertruck. Morgan Stanley analyst Adam Jones said, “Expectations seem quite low on the quarter.” In the research note, he said, “it is tough to find an investor who doesn’t expect negative revisions out of the quarter.”
Piper Sandler analyst Alexander Potter kept an overweight rating on the share and lowered his price target on TSLA to $290 from $300. “Cybertruck and other growth initiatives are on the horizon – but still, we wouldn’t be surprised if TSLA trades sideways, at best, in the coming months.”
Currently, TSLA is trading at an expensive valuation. In terms of forward EV/EBITDA, TSLA’s 45.52x is 395.6% higher than the 9.19x industry average. Likewise, its 7.93x forward EV/Sales is 618.4% higher than the 1.10x industry average. Its 74.95x forward non-GAAP P/E is 434.7% higher than the 14.02x industry average.
The stock has declined 9.8% over the past three months but gained 106.1% year-to-date to close the last trading session at $253.92.
Given these factors, investors could consider buying PII, SZKMY, and ISUZY. Let’s discuss the fundamentals of these three Auto & Vehicle Manufacturers stock picks, starting with the third choice.
Stock #3: Polaris Inc. (PII)
PII designs, engineers, manufactures, and markets powersports vehicles worldwide. It operates through three segments: Off-Road, On-Road, and Marine. The company offers off-road vehicles (ORVs); military and commercial ORVs; snowmobiles; motorcycles; moto-roadsters, quadricycles, and boats; and aftermarket parts and apparel.
In terms of forward non-GAAP P/E, PII's 9.45x is 32.6% lower than the 14.02x industry average. Its 6.54x forward EV/EBITDA is 28.8% lower than the 9.19x industry average. Its 0.82x forward EV/Sales is 25.4% lower than the 1.10x industry average.
PII's sales for the second quarter ended June 30, 2023, increased 7.5% year-over-year to $2.22 billion. The company’s adjusted gross profit rose 6.5% year-over-year to $505 million. Its adjusted EBITDA rose 4.2% year-over-year to $265.50 million.
On the other hand, the company’s adjusted net income from continuing operations attributable to PII declined 4.8% year-over-year to $139.60 million. Additionally, its adjusted EPS from continuing operations attributable to PII remained flat year-over-year to come in at $2.42.
Analysts expect PII’s EPS for the quarter ended September 30, 2023, to decline 16.5% year-over-year to $2.71. Its revenue for fiscal 2023 is expected to increase 3.9% year-over-year to $8.92 billion. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 2% to close the last trading session at $97.67.
PII’s fundamentals are reflected in its POWR Ratings. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has a B grade for Value. Within the B-rated Auto & Vehicle Manufacturers industry, it is ranked #26 out of 52 stocks.
In total, we rate PII on eight different levels. Beyond what we stated above, we also have given PII grades for Growth, Momentum, Stability, Sentiment, and Quality. Get all the PII ratings here.
Stock #2: Suzuki Motor Corporation (SZKMY)
Headquartered in Hamamatsu, Japan, SZKMY manufactures and markets automobiles, motorcycles, and marine products in Japan, the rest of Asia, Europe, North America, and internationally. It offers mini-vehicles, sub-compact vehicles, standard-sized vehicles, outboard motors, motorized wheelchairs, and electro-senior vehicles. The company is also involved in solar power generation and logistics business.
In terms of forward EV/EBIT, SZKMY's 7.78x is 39.6% lower than the 12.87x industry average. Its 5.26x forward EV/EBITDA is 42.7% lower than the 9.19x industry average. Its 0.56x forward Price/Sales is 33.3% lower than the 0.84x industry average.
For the fiscal first quarter ended June 30, 2023, SZKMY’s net sales increased 13.7% year-over-year to ¥1.21 trillion ($8.09 billion). Its operating profit rose 33.9% over the prior-year quarter to ¥99.80 billion ($667.38 million). The company’s ordinary profit increased 20.3% year-over-year to ¥108 billion ($722.22 million).
Also, its profit attributable to owners of parent rose 15.1% year-over-year to ¥67.06 billion ($448.44 million). In addition, its EPS came in at ¥138.04, representing an increase of 15% year-over-year.
Street expects SZKMY’s revenue for the quarter ended September 30, 2023, to increase 9.7% year-over-year to $8.70 billion. Over the past year, the stock has gained 27.8% to close the last trading session at $160.19.
SZKMY’s positive outlook is reflected in its POWR Ratings. It has an overall rating of A, equating to a Strong Buy in our proprietary rating system.
It is ranked #9 in the same industry. It has an A grade for Stability and a B for Value and Quality. To see the other ratings of SZKMY for Growth, Momentum, and Sentiment, click here.
Stock #1: Isuzu Motors Limited (ISUZY)
Headquartered in Yokohama-shi, Japan, ISUZY manufactures and sells commercial vehicles, light commercial vehicles, and diesel engines and components worldwide. Its products include heavy and medium-duty trucks, buses, and light-duty trucks; passenger pickup vehicles, pickup trucks, and SUVs; and marine and industrial engines. The company also supplies diesel engines to manufacturers in various fields.
In terms of forward EV/Sales, ISUZY's 0.52x is 53.1% lower than the 1.10x industry average. Its 4.62x forward EV/EBITDA is 49.7% lower than the 9.19x industry average. Its 0.41x forward Price/Sales is 51.1% lower than the 0.84x industry average.
ISUZY’s net sales for the first quarter ended June 30, 2023, increased 12.7% year-over-year to ¥775.47 billion ($5.19 billion). Its operating income rose 25.3% over the prior-year quarter to ¥68.61 billion ($458.81 million). The company’s ordinary income increased 27.3% year-over-year to ¥74.89 billion ($500.81 million).
Also, its net income attributable to owners of parent rose 24.9% year-over-year to ¥45.04 billion ($301.19 million). In addition, its net income per share came in at ¥58.11, representing an increase of 24.9% year-over-year.
For fiscal 2024, ISUZY’s revenue is expected to increase 137.5% year-over-year to $22.87 billion. Over the past year, the stock has gained 6.4% to close the last trading session at $12.10.
ISUZY’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
It is ranked #3 in the Auto & Vehicle Manufacturers industry. It has an A grade for Value and a B for Growth, Stability, and Quality. Click here to see the other ratings of ISUZY for Momentum and Sentiment.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
SZKMY shares were trading at $159.89 per share on Tuesday afternoon, down $0.31 (-0.19%). Year-to-date, SZKMY has gained 24.35%, versus a 15.67% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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