Automotive titan Tesla, Inc. (TSLA) has pioneered the battery electric vehicle (BEV) space. However, TSLA has been sliding from its leadership position in the BEV space, with existing automakers and new entrants grabbing market share. Therefore, investors looking to capitalize on the EV industry’s long-term prospects could invest in fundamentally sound stocks Mercedes-Benz Group AG (MBGAF), Stellantis N.V. (STLA), and Honda Motor Co., Ltd. (HMC) instead.
Before discussing what makes these stocks wise investments, let me explain why it could be wise to avoid TSLA now.
TSLA has dominated the electric vehicle space as it was among the first movers switching from internal combustion engine (ICE) vehicles to BEVs. However, TSLA’s dominance is threatened, with legacy automakers switching to electric vehicles. Also, the entry of several new-age EV manufacturers reduces the EV giant’s market share.
Although auto sales dropped to their lowest level in over a decade, the U.S. electric vehicle market nearly doubled last year, with BEV registrations climbing to 5.6% of all light-vehicle registrations, up from 3.1% in 2021. EV market share in the United States has exceeded the last two years, reaching 8.5%. TSLA’s U.S. electric vehicle market share has fallen from 71% in 2021 to 64% in 2022.
Moreover, the company missed Wall Street’s EV production and delivery estimates in the fourth quarter. S&P Global Mobility said, “Tesla’s position is changing as new, more affordable options arrive, offering equal or better technology and production build.”
On the other hand, TSLA is currently trading at a significant premium to its peers. In terms of forward Price/Sales, TSLA’s 6x is 612.1% higher than the 0.84x industry average. Its 48.59x forward non-GAAP P/E is 249.6% higher than the 13.90x industry average. Likewise, its 11.26x forward Price/Book is 351.6% higher than the 2.49x industry average.
For the fourth quarter ended December 31, 2022, TSLA’s total revenues increased 37% year-over-year to $24.32 billion. Its adjusted EBITDA rose 32% over the prior-year quarter to $5.40 billion. However, its adjusted EBITDA margin declined 86 basis points. The company’s non-GAAP net income attributable increased 43% year-over-year to $4.11 billion.
Its net cash flow provided by operating activities declined 29% year-over-year to $3.28 billion, while its free cash flow decreased 49% year-over-year to $1.42 billion.
Electric vehicle sales are expected to grow further this year, driven by price cuts, attractive subsidies, fast-growing charging infrastructure, and tax cuts. The Inflation Reduction Act, signed into law by President Biden in August, seeks to provide tax credits of up to $7,500 for certain electric vehicles.
Therefore, to capitalize on the industry’s long-term prospects, one could invest in MBGAF, STLA, and HMC instead of TSLA. Let’s delve deeper into the fundamentals of these stocks.
Mercedes-Benz Group AG (MBGAF)
Headquartered in Stuttgart, Germany, MBGAF develops, manufactures, and sells premium and luxury cars and vans under the Mercedes-AMG, Mercedes Benz, Mercedes-Maybach, and Mercedes-EQ brands. It also provides financing, leasing, car subscription and rental, fleet management, insurance brokerage, mobility services, and digital services for charging and payment.
On February 16, 2023, MBGAF announced that its Board of Management and the Supervisory Board would conduct a share buyback program starting in March 2023. Shares worth €4 billion are intended to be repurchased over two years. This is expected to create shareholder value.
On February 22, 2023, MBGAF and Google announced a long-term strategic partnership to accelerate auto innovation and create a next-generation digital luxury car experience. With this partnership, MBGAF will become the first automaker to build its branded navigation experience based on new in-car data and navigation capabilities from the Google Maps platform.
In terms of forward EV/EBITDA, MBGAF’s 6.74x is 27% lower than the 9.22x industry average. Its 5.26x forward non-GAAP P/E is 62.1% lower than the 13.90x industry average. Likewise, its 0.50x forward Price/Sales is 41% lower than the 0.84x industry average.
MBGAF’s revenue for the fourth quarter ended December 31, 2022, increased 16% year-over-year to €41 billion ($44.45 billion). Its adjusted EBIT rose marginally to €5.07 billion ($5.50 billion). In addition, its net profit increased 63% year-over-year to €4.03 billion ($4.37 billion). Also, its EPS came in at €3.72, representing an increase of 66% year-over-year.
Analysts expect MBGAF’s revenue for the quarter ending March 31, 2023, to increase 8.5% year-over-year to $39.92 billion. Over the past six months, the stock has gained 48.3% to close the last trading session at $76.26.
MBGAF’s POWR Ratings reflect solid prospects. The company has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
Within the Auto & Vehicle Manufacturers industry, it is ranked #4 out of 56 stocks. It has an A grade for Sentiment and a B for Value, Momentum, Stability, and Quality. Click here to see MBGAF’s rating for Growth.
Stellantis N.V. (STLA)
Headquartered in Hoofddorp, Netherlands, STLA designs, engineers, manufactures, distributes, and sells vehicles, components, and production systems. The company’s brand portfolio includes Abarth, Alfa Romeo, Chrysler, Dodge, Fiat, Fiat Professional, Jeep, Lancia, Ram, Peugeot, Citroen, Maserati, DS Automobiles, Opel, and Vauxhall.
On January 18, 2023, STLA announced that it had signed an agreement with Finland-based Terrafame for nickel sulphate to be used in EV batteries. This agreement is part of STLA’s electrification strategy and will cover a significant portion of the need for sustainable, regionally sourced nickel.
STLA CEO Carlos Tavares said, “This agreement is part of the key raw material sourcing to fit with our electrified vehicle battery pack needs. We continue to build a new global value chain with Class A partners to support our global strategy and propel our commitment to being the industry champion in climate change mitigation, becoming carbon net zero by 2038, ahead of our competition.”
On January 9, 2023, STLA signed a binding agreement with Element 25 Limited to supply high-purity manganese sulphate monohydrate used for EV batteries. The five-year agreement will see shipments beginning in 2026, with further provisions to extend the term and increase volumes. With this agreement, STLA strengthens its value chain for EV battery production, thereby supporting its Dare Forward 2030 strategic plan targets.
In terms of forward non-GAAP P/E, STLA’s 3.94x is 71.7% lower than the 13.90x industry average. Its 1.14x forward EV/EBITDA is 87.6% lower than the 9.22x industry average. Likewise, its 1.53x forward EV/EBIT is 88.2% lower than the 12.96x industry average.
For the fiscal year ended December 31, 2022, STLA’s net revenues increased 20.2% year-over-year to €179.59 billion ($194.68 billion). Its operating income rose 32.3% from the prior-year period to €20.01 billion ($21.69 billion). The company’s net profit increased 18.1% year-over-year to €16.78 billion ($18.19 billion). Also, its EPS came in at €5.31, representing an increase of 17.7% year-over-year.
Analysts expect STLA’s EPS for the quarter ending March 31, 2023, to increase 6.6% year-over-year to $46.64 billion. Over the past six months, the stock has gained 48.3% to close the last trading session at $17.77.
STLA’s POWR Ratings reflect this promising outlook. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.
It has an A grade for Value and a B for Momentum, Stability, Sentiment, and Quality. It is ranked #2 in the same industry. To see STLA’s rating for Growth, click here.
Honda Motor Co., Ltd. (HMC)
Headquartered in Tokyo, Japan, HMC develops, manufactures, and distributes motorcycles, automobiles, power products, and other products in Japan, North America, Europe, Asia, and internationally. It operates through four segments: Motorcycle Business; Automobile Business; Financial Services Business; and Life Creation and Other Businesses.
On February 28, 2023, HMC and LG Energy Solution held the groundbreaking ceremony for their joint venture EV battery plant spread over 2 million square feet. The facility is scheduled to be completed by the end of 2024, aiming for an annual production capacity of 40 GWh. The JV company will deliver lithium-ion batteries to support HMC’s plan to build battery-electric vehicles (BEV) in North America.
In terms of forward EV/Sales, HMC’s 0.58x is 47.4% lower than the 1.11x industry average. Its 0.34x forward Price/Sales is 60.1% lower than the 0.84x industry average. Likewise, its 11.01x forward EV/EBIT is 15% lower than the 12.96x industry average.
HMC’s sales revenue for the third quarter that ended December 31, 2022, increased 20.3% year-over-year to ¥4.44 trillion ($33.59 billion). The company’s operating profit increased 22.2% year-over-year to ¥280.49 billion ($2.12 billion). Its profit for the period increased 27.7% year-over-year to ¥265.14 billion ($2 billion). In addition, its EPS came in at ¥144.49, representing an increase of 28.5% year-over-year.
For the quarter ending March 31, 2023, HMC’s revenue is expected to increase 11.3% year-over-year to $33.35 billion. Its EPS for the fiscal year 2024 is expected to increase 0.3% year-over-year to $3.18. Over the past six months, the stock has gained 17.8% to close the last trading session at $26.13.
HMC’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.
Within the Auto& Vehicle Manufacturers industry, it is ranked first. HMC has an A grade for Value and Sentiment and a B for Momentum, Stability, and Quality. Click here to see HMC’s rating for Growth.
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TSLA shares rose $1.11 (+0.57%) in premarket trading Thursday. Year-to-date, TSLA has gained 57.40%, versus a 5.35% 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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