The auto sector is expected to experience growth due to increased demand for electric vehicles and advanced automotive technologies boosting performance, efficiency, and connectivity.
Given the industry’s growth prospects, investors could consider buying fundamentally sound auto stocks Toyota Motor Corporation (TM), O’Reilly Automotive, Inc. (ORLY) and Group 1 Automotive, Inc. (GPI) for solid returns.
Before diving deeper into their fundamentals, let’s discuss what’s happening in the auto industry.
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.
This will be the first time that more than one million EVs are sold in the United States in a single calendar year, with sales likely to range between 1.3 million and 1.4 million cars.
The global car rental market is expected to reach $126.60 billion by 2028, growing at a CAGR of 4.3%. Because of growing tourism, business travel, and vehicle-sharing services, the worldwide car rental market is predicted to rise steadily, particularly in emerging economies.
Moreover, the global automotive market will reach $6.07 trillion by 2030, expanding at a CAGR of 6.9%.
Considering these conducive trends, let’s look at the fundamentals of the three Auto stocks.
Toyota Motor Corporation (TM)
Based in Toyota, Japan, TM designs, produces, assembles, and sells passenger vehicles, minivans, and commercial vehicles, as well as related parts and accessories, in Japan, North America, Europe, Asia, Central and South America, Oceania, Africa, and the Middle East. It operates in three segments: automotive; financial services; and all other.
TM’s forward EV/EBITDA multiple of 9.58 is marginally lower than the industry average of 9.60. Its forward Price/Cash Flow multiple of 5.94% is 37.8% lower than the industry average of 9.55.
TM’s trailing-12-month Capex/Sales of 9.27% is 196.3% higher than the 3.13% industry average. Its trailing-12-month net income margin of 9.34% is 110.5% higher than the 4.44% industry average.
During its fiscal second quarter, ended September 30, TM’s total sales revenue increased 24% year-over-year to ¥11.43 trillion ($76.54 billion). Its operating income grew 155.6% from its year-ago value to ¥1.44 trillion ($9.63 billion). TM’s net income came in at ¥1.32 trillion ($8.84 billion), indicating a 186.3% rise year-over-year. The company’s EPS increased 197.9% year-over-year to $94.51.
The consensus revenue estimate of 291.04 billion for the year ending March 2023 represents a 5.2% increase year-over-year. Its EPS is expected to grow 668.2% year-over-year to $20.49 for the same period. TM’s shares have gained 34.9% year-to-date to close the last trading session at $184.43.
TM’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
TM also has an A grade for Sentiment and a B for Growth and Stability. It is ranked #23 out of 52 stocks in the B-rated Auto & Vehicle Manufacturers industry. Click here to see the additional POWR Ratings for Value, Momentum and Quality for TM.
O’Reilly Automotive, Inc. (ORLY)
ORLY is a specialty retailer of automotive aftermarket parts, tools, supplies, equipment, and accessories. Its offerings include new and remanufactured automotive hard parts and maintenance items, such as alternators, batteries, brake system components, belts, chassis parts, driveline parts, engine parts, fuel pumps, etc.
ORLY’s trailing-12-month ROTC of 36.01% is 499% higher than the 6.01% industry average. Its trailing-12-month ROTA of 17.14% is 337.4% higher than the 3.92% industry average.
ORLY’s sales increased 10.7% year-over-year to $4.20 billion in the third quarter (ended September 30, 2023), while its gross profit grew 11.7% from the year-ago value to $2.16 billion.
The company’s net income and EPS increased 11% and 16.9% year-over-year to $649.83 million and $10.72, respectively.
Street expects ORLY’s revenue to increase 9.8% year-over-year to $15.83 billion for the year ending December 2023. Its EPS is expected to grow 14.5% year-over-year to $38.29 for the same period. It has surpassed EPS estimates in all four trailing quarters. Over the past nine months, the stock has gained 17.7% to close the last trading session at $991.46.
ORLY’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system.
It is ranked #24 out of 61 stocks in the A-rated Auto Parts industry. It has an A grade for Quality and a B for Sentiment. To see additional ORLY’s ratings for Growth, Value, Stability, and Momentum, click here.
Group 1 Automotive, Inc. (GPI)
GPI, through its subsidiaries, operates in the automotive retail industry in the United States and the United Kingdom.
GPI’s forward non-GAAP P/E of 6.20x is 57.9% lower than the industry average of 14.73x. Its forward EV/EBIT of 7.75x is 40.8% lower than the industry average of 13.10x.
GPI’s trailing-12-month ROCE of 26.24% is 138.7% higher than the 10.99% industry average. Its trailing-12-month ROTA of 8.73% is 122.9% higher than the 3.92% industry average.
For the fiscal third quarter that ended September 30, 2023, GPI’s total revenues increased 13% year-over-year to $4.71 billion, while its gross profit increased 4.5% year-over-year to $786.20 million. Its income from operations stood at $261.60 million. Also, its adjusted earnings per common share from continuing operations stood at $ $12.07.
Analysts expect GPI’s revenue to increase 9.4% year-over-year to $17.75 billion for the year ending December 2023. Its EPS is expected to come in at $45.32 for the same period. It has surpassed EPS estimates in all four trailing quarters. Shares of GPI has gained 55.2% year-to-date to close the last trading session at $280.
It’s no surprise that GPI has an overall B rating, equating to a Buy in our POWR Ratings system. It has an A grade for Value. It is ranked #5 out of 21 stocks in the Auto Dealers & Rentals industry.
Beyond what is stated above, we’ve also rated GPI for Growth, Stability, Momentum, Sentiment and Quality. Get all GPI ratings here.
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.
TM shares were trading at $184.23 per share on Thursday morning, up $1.02 (+0.56%). Year-to-date, TM has gained 37.07%, versus a 20.30% 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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