In this piece, I evaluated two auto manufacturing stocks, China-based NIO Inc (NIO) and Japan-based Honda Motor Co., Ltd. (HMC), to determine a better investment. Based on the fundamental comparison of these stocks, I believe HMC is the better buy for the reasons explained throughout this article.
The auto industry is well-poised for robust growth in the foreseeable future, thanks to rising demand for personal and commercial vehicles, the emergence of electric and self-driving cars, and growing consumer awareness of safety and environmental issues.
The global automotive market is expected to grow to $28.70 billion by 2030 at a CAGR of 4.5%, which should bode well for auto companies like NIO and HMC.
HMC is a clear winner in terms of price performance, with 28.8% returns over the past year compared to NIO’s 51% decline. HMC has gained 37% year-to-date, while NIO plunged 3.6%. Also, HMC’s 22.8% gains over the past six months are higher than NIO’s gain of 10.6%.
Here are the reasons why we think HMC could perform better in the near term:
Latest Developments
On May 24, 2023, NIO launched the All-New ES6, an all-round smart electric SUV, whose deliveries commenced the next day. The vehicle has received overwhelmingly positive feedback from users due to its exquisite design, high performance, superior comfort, and advanced digital systems.
On February 28, HMC and LG Energy Solution held the official ground-breaking ceremony for a new joint venture EV battery plant in Fayette, Ohio. In January, both companies entered into a JV agreement to produce lithium-ion batteries for EVs. The facility aims to have an annual production capacity of about 40GWh.
Batteries generated by the new JV would be supplied exclusively to HMC plants in North America to power battery EVs. This strategic alliance is expected to boost HMC’s revenue streams in the upcoming years.
Recent Financial Results
During the first quarter that ended March 31, 2023, NIO’s revenues grew 7.7% year-over-year to $1.55 billion. However, its vehicle margin for the quarter was 5.1%, compared to 18.1% in the previous-year quarter. The company’s gross profit fell 88.8% year-over-year to $23.62 million. Furthermore, the company’s adjusted net loss per ADS rose 217.7% from the prior year’s quarter to $0.36.
On the other hand, during the fiscal year that ended March 31, 2023, HMC’s sales revenue grew 16.2% year-over-year to ¥16.91 trillion ($119.17 billion). Its profit for the year rose marginally year-over-year to ¥761.16 billion ($5.36 billion). Its cash flow from operating activities came in at ¥2.13 trillion ($15.10 billion), up 26.8% from its year-ago period.
Also, as of March 31, 2023, the company’s cash and cash equivalents stood at ¥3.80 trillion ($2678 billion), compared to ¥3.93 trillion ($27.70 billion) as of March 31, 2022.
Past And Expected Financial Performance
Over the past three years, NIO’s revenue rose at a CAGR of 87.7%. Analysts expect NIO’s EPS to decline 78.3% in the current quarter, rise a mere 1.4% in the next quarter, and rise 2.8% in the current year. The company’s revenue is expected to decrease 11.8% in the current quarter, increase 40.2% in the next quarter, and rise 30% in the current year.
On the other hand, HMC’s revenue and EPS grew at a CAGR of 4.2% and 16.4% over the past three years. Analysts expect the company’s revenue to rise 11.7% in the current quarter, 15% in the next quarter, and 400.3% in the current year. The company’s EPS is expected to grow 29.5% in the current year.
Profitability
HMC is more profitable, with a trailing-12-month gross profit margin of 19.70% compared to NIO’s 7.80%. Also, HMC’s trailing-12-month EBITDA margin and net income margin of 9.23% and 4.11% are higher than NIO’s negative 30.74% and negative 35.05%, respectively.
Furthermore, HMC’s trailing-12-month ROCE, ROTA, and ROTC of 6.41, 2.82%, and 2.71% are favorably higher than NIO’s negative 65.49%, 19.63%, and 20.77%, respectively.
Stable Dividend-Paying History
HMC’s forward annual dividend of $0.86 translates to a dividend yield of 2.74% on the current price level. Over the last three years, HMC’s dividend payouts have grown at 4.1% CAGR. The company’s four-year average dividend yield is 3.36%.
However, NIO does not pay any dividends.
Valuation
In terms of forward EV/Sales, NIO is currently trading at 1.68x, higher than HMC, which is trading at 0.61x. Likewise, NIO’s forward P/S multiple of 1.68 is higher than HMC’s 0.39.
POWR Ratings
NIO has an overall rating of F, which equates to a Strong Sell in our proprietary POWR Ratings system. Conversely, HMC 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. HMC has a grade of B for Stability, in sync with the stock’s 24-month beta of 0.52. NIO, on the other hand, has a grade of F for Stability, which is justified by its 24-month beta of 1.17.
HMC has a B grade for Quality. Its trailing-12-month cash from operations and cash per share of $16.04 billion and $17.21 are significantly higher than the industry averages of $181.73 million and $2.36.
However, NIO has a grade of D for Quality. Its trailing-12-month cash from operations of negative $560.53 million compares to the $181.73 million industry average. Its $1.30 trailing-12-month cash per share is 44.7% lower than the $2.36 industry average.
Of the 57 stocks in the Auto & Vehicle Manufacturers industry, NIO is ranked #52, while HMC is ranked first.
Beyond what we’ve stated above, we have also rated both stocks for Sentiment, Momentum, Value, and Growth. Click here to view NIO ratings. Get all HMC ratings here.
The Winner
As the global economy gradually gets back on track, sales of commercial and personal vehicles are expected to soar. Moreover, the electric vehicle (EV) market has proliferated in recent years and is expected to expand over the coming decade amid increasing EV adoption and government initiatives. Leading auto companies NIO and HMC are expected to benefit significantly from the industry’s bright growth prospects.
However, NIO’s poor financials, low profitability, and bleak growth prospects make its competitor HMC 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 or Buy. View all the top-rated stocks in the Auto & Vehicle Manufacturers industry 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:
HMC shares were unchanged in premarket trading Monday. Year-to-date, HMC has gained 38.74%, versus a 15.35% 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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