QuantumScape (QS) vs. Continental AG (CTTAY) - Auto Stock Buy or Sell?

The automotive industry readies itself for substantial growth, fueled by heightened vehicle demand, consistent aftermarket sales, and the jolt of Electric Vehicles (EVs). In this piece, I explored two auto stocks, QuantumScape Corporation (QS) and Continental Aktiengesellschaft (CTTAY), seeking to unveil the one with a potential edge.

Before delving into the fundamentals of the stocks, let's take a peek under the hood of the automotive industry.

The auto industry confronted significant global disruptions in the past years. Factors such as COVID-19, Asia-Pacific tensions, and the Russia-Ukraine conflict fostered an atmosphere of uncertainty and reluctance. Moreover, scarcities ranging from microchips to labor reverberated throughout the entire automotive supply chain.

In reaction to pandemic-induced supply chain disruptions, aggravated by the Russia-Ukraine conflict, the industry proactively crafted inventive remedies. Automakers instigated a transition from "just-in-time" to "inventory banking" approaches, reinforcing the supply chain and adeptly tackling these formidable obstacles.

With that being said, the joint report from J.D. Power and GlobalData projects U.S. new vehicle sales for August to surge by 15.4% year-over-year, totaling an estimated 1,354,600 units. Also, owing to supply chain enhancements, global sales for 2023 are anticipated to reach 86.8 million units, surpassing the prior estimate of 86.4 million units.

Apart from the escalating demand for vehicles, the sustained growth in aftermarket sales and the increasing fascination with electric and hybrid vehicles are also driving the global auto parts manufacturing sector forward.

According to a report by Research and Markets, the global auto parts manufacturing market is estimated to grow at a CAGR of 6.3% and reach $939.21 billion by 2028. Also, as per Business Research Insights, the global automotive market size is expected to grow at a CAGR of 3% and reach $3.27 trillion by 2028.

That said, QS and CTTAY are expected to benefit from the industry’s tailwinds.

In terms of price performance, QS has gained 3.1% over the past month compared to CTTAY’s 1.1% decline. However, QS has plunged 6% over the past six months, compared to CTTAY’s 4.5% gain during the same period.

Also, QS has plummeted 37.3% over the past year to close the last trading session at $7.03, while CTTAY has jumped 27.8% during the same time frame to close the last trading session at $7.17.

But which Auto Parts stock could be a better pick? Let’s find out.

Recent Financial Results

For the second quarter that ended June 30, 2023, QS’ loss from operations widened 28.9% year-over-year to $123.54 million. Its net loss and net loss per share widened 22.8% and 18.2% from the prior year’s period to $116.51 million and $0.26, respectively.

Additionally, as of June 30, 2023, the company’s total assets stood at $1.35 billion, compared to $1.48 billion as of December 31, 2022.

For the second quarter that ended June 30, 2023, CTTAY’s adjusted sales increased 10.2% year-over-year to €10.38 billion ($11.10 billion) while gross margin on sales grew 50.3% from the year-ago value to €2.22 billion ($2.37 billion).

In addition, the company’s net income and earnings per share came in at €220.80 million ($235.94 million) and €1.04, compared to a net loss and loss per share of €242 million ($258.59 million) and €1.26 in the prior year’s period.

Past and Expected Financial Performance

Over the past three years, QS’ total assets increased at a CAGR of 109.7%.

Analysts expect QS’ revenue to come in at $2.80 million for the fiscal year ending December 2024. The company’s loss per share is expected to marginally widen from the prior year to $0.87. Also, the company missed its consensus EPS estimates in three of four trailing quarters, which is disappointing.

Over the past three years, CTTAY’s revenue and EBITDA increased at a CAGR of 4.6% and 10.3%, respectively. In addition, its normalized net income surged at a CAGR of 33.6%.

The consensus revenue estimate of $47.16 billion for the fiscal year ending December 2024 reflects a 3.8% improvement year-over-year. Likewise, the company’s EPS for the same period indicates a 32.2% rise from the previous year to $0.96. Also, the company surpassed the consensus revenue estimates in three of the trailing four quarters, which is impressive.

Valuation

In terms of trailing-12-month Price to Book, QS is currently trading at 2.60x, 170.8% higher than CTTAY, which is trading at 0.96x. Therefore, CTTAY is relatively more affordable.

Profitability

CTTAY is more profitable, with a trailing-12-month ROCE of 5.08%, compared to QS’ negative 33.62%. Moreover, CTTAY has a trailing-12-month cash from operations of $2.46 billion compared to QS’ negative $239.28 million.

Additionally, CTTAY’s trailing-12-month ROTA and ROTC are 2.11% and 6.98%, respectively, compared to QS’ ROTA of negative 31.24% and ROTC of negative 20.33%.

POWR Ratings

QS has an overall rating of F, which equates to a Strong Sell in our proprietary POWR Ratings system. Conversely, CTTAY has an overall rating of A, translating to a Strong Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. QS has a D grade for Quality, in sync with its trailing-12-month ROTC of negative 20.33% compared to the industry average of 6.11%. On the other hand, CTTAY has a B grade for Quality, justified by its trailing-12-month ROTC of 6.98%, 14.3% higher than the industry average.

In addition, QS has a C grade for Growth, justified by its comparatively less optimistic growth record, whereas CTTAY has an A grade for Growth, consistent with its solid historical growth record.

Of the 59 stocks in the A-rated Auto Parts industry, QS is ranked last, while CTTAY is ranked #9. 

Beyond what we’ve stated above, we have also rated both stocks for Value, Momentum, Stability, and Sentiment. Click here to view QS’ ratings. Get all CTTAY ratings here.

The Winner

Leading auto parts stocks QS and CTTAY are well-positioned to capitalize on the industry’s prospects due to robust automotive demand and greater EV proliferation. However, considering QS’ comparatively poor financial performance and low profitability, CTTAY seems to be a better buy now.

Our research shows that the odds of success increase when one invests in stocks with an overall rating of Strong Buy. View all the top-rated stocks in the Auto Parts industry here.

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CTTAY shares were trading at $7.21 per share on Wednesday afternoon, up $0.04 (+0.53%). Year-to-date, CTTAY has gained 22.76%, versus a 17.35% rise in the benchmark S&P 500 index during the same period.

Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.

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