With the reopening of factories and resumption of production worldwide, the auto manufacturing industry is back in business this year from its forced, COVID-19- driven hiatus. Buoyed by a pent-up demand for personal vehicles and a growing interest in electric vehicles (EVs), the industry has seen a significant increase in sales so far this year. In fact, the global automotive aftermarket is expected to grow at a 3.8% CAGR of 3.8% over the next seven years to hit $529.25 billion by 2028.
However, the automobile industry has been facing a serious problem. A global semiconductor shortage has forced automakers to cut production and idle plants. Given that the shortage is expected to last at least until year’s end, many auto manufacturers have been hoarding their chips on hand for their expensive models.
Volkswagen AG (VWAGY) and Daimler AG (DDAIF) have managed to overcome the shortage issue by diversifying its supply chains, scaling up production, and maintaining a good warehouse of the required components. So, we believe these two stocks should continue to be strong performers this year. Conversely, XPeng Inc. (XPEV) and Li Auto Inc. (LI) are struggling to stay afloat due to the chip shortage, and to weakness in their financials. So, we think these two stocks will witness a further decline.
Click here to check out our Automotive Industry Report for 2021
Stocks to buy:
Volkswagen AG (VWAGY)
VWAGY, which is known internationally as the Volkswagen Group, is a Germany-based automotive manufacturing corporation. The Group comprises 12 brands from seven European countries: Volkswagen, Audi, SEAT, ŠKODA, Bentley, Bugatti, Lamborghini, Porsche, Ducati, Volkswagen Commercial Vehicles, Scania and MAN. In addition, VWAGY offers a wide range of financial services, including dealer and customer financing, leasing, banking and insurance activities, and fleet management.
In April, VWAGY China commenced the construction of an all-new MEB plant at Volkswagen Anhui. The plant is set to begin production in the second half of 2023, and it will be powered by green energy. This plant should advance VWAGY’s global e-mobility strategy , moving it toward a low-carbon future.
Also this month, the company became a founding member of the Catena-X Automotive Network that was created with the goal of bringing uniform standards to the flow of data and information in the automotive value chain. This cross-company, secure and antitrust law compliant data exchange should result in new opportunities for increased efficiency and transparency for VWAGY’s production and supply chains.
In the fiscal year ended December 31, VWAGY reported a €4.12 billion gross profit on sales. The company’s net income for the fiscal year increased 27.8% year-over-year to €6.34 billion, while its net retained profits increased 23.2% year-over-year to €4.03 billion over the same period.
A $6.17 consensus EPS estimate for 2021 represents a 207.3% improvement year-over-year. The $299.5 billion consensus revenue for the current year indicates an 11.3% increase year-over-year. The stock has gained 117.2% over the past year.
VWAGY’s POWR Ratings reflect this promising outlook. The company has an overall A rating , which translates to Strong Buy in our proprietary ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
VWAGY has a grade of A for Growth, and a B for Sentiment, Momentum and Value. Of the 53-stocks, B-rated Auto & Vehicle Manufacturers industry, it is ranked #4.
To see additional POWR Ratings for Stability and Quality for VWAGY, Click here.
Daimler AG (DDAIF)
Headquartered in Stuttgart, Germany, DDAIF manufactures passenger cars, trucks, vans, and buses in Germany and internationally. The company is one of the leading global suppliers of premium and luxury cars and one of the world’s largest manufacturers of commercial vehicles. It operates through Mercedes-Benz Cars & Vans, Daimler Trucks and Buses, and Daimler Mobility segments.
This month, DDAIF’s Mercedes brand introduced two powerful and efficient all-wheel-drive models, which are for sale as the EQA 300 4MATIC and EQA 350 4MATIC. The shift to an all-electric vehicle should help the company capitalize on EV industry tailwinds.
DDAIF’s revenue has increased 10.2% year-over-year to €41.02 billion in the first quarter ended March 31, 2021. Its net profit increased significantly from the year-ago value to €4.37 billion. The company’s EBIT rose 832% year-over-year to €5.75 billion. Its EPS came in at €4.01, compared to €0.09 in the first quarter of 2020.
A $12.37 consensus EPS estimate for 2021 indicates a 203.2% improvement year-over-year. The $209.5 consensus revenue estimate for the current year indicates a 12.8% increase year-over-year. DDAIF’s stock has gained 159% over the past year.
DDAIF’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall A rating, which equates to Strong Buy in our proprietary ratings system. DDAIF has an A grade for Growth, Value and Sentiment, and a B grade for Momentum. In the same industry, it is ranked #1.
In total, we rate DDAIF on eight different components. Beyond what we stated above we have also given DDAIF grades for Quality and Stability. Get the ratings here.
Stocks to avoid:
XPeng Inc. (XPEV)
Headquartered in Guangzhou, China, XPEV manufactures smart electric vehicles. It offers SUVs under the G3 name and a four-door sports sedan under the P7 name. The company also provides sales contract, maintenance, super charging, vehicle leasing, and ride-hailing services.
This month, XPEV signed a memorandum of understanding (MoU) with Zhongsheng Group, a leading automobile dealership group in China. It did so to establish a long-term strategic partnership to provide both XPEV’s industry-leading Smart EV products and Zhongsheng’s high quality services to consumers to further accelerate Smart EV adoption in China.
XPEV’s total operating expenses increased 31.4% year-over-year to RMB $1.38 billion for the fiscal fourth quarter, ended December 31, 2020. The company reported a RMB $1.12 billion loss from operations, representing a 2.8% year-over-year increase over the same period. Its loss per share came in at RMB $1.05 over this period.
Analysts expect XPEV’s EPS to decline at the rate of 5.1% per annum over the next five years. The stock has declined 39.8% over the past three months.
XPEV’s POWR Ratings are consistent with this bleak outlook. It has an overall D rating, which equates to Sell in our POWR Ratings system. XPEV has an F grade for Stability, and a grade of D for Growth, Value and Quality. Of the 53 stocks in the Auto & Vehicle Manufacturers industry, it is ranked #44.
Click here to see the additional POWR Ratings for XPEV (Sentiment and Momentum).
Li Auto Inc. (LI)
Formerly known as Leading Ideal Inc., LI is an innovator in China’s new energy vehicle market. The company manufactures and sells premium smart electric vehicles. It concentrates its in-house development efforts on its proprietary range extension system, next-generation electric vehicle technology, and smart vehicle solutions.
This month, Li reported that it recently completed the delivery of 5,539 Li ONEs, representing a 111.3% year-over-year increase and taking its cumulative deliveries to 51,715. The Company took only 17 months to reach its 50,000th delivery milestone, representing the fastest new energy vehicle company to do so. This should help Li in capturing an increasing share of the electric vehicle market and further strengthen its direct sales and servicing network.
In the fourth quarter, ended December 31, 2020, LI reported a RMB 78.9 million loss from operations, representing a 56.2% decrease year-over-year. The company’s gross margin was 17.5% in the fourth quarter of 2020, compared with 19.8% in the third quarter of 2020.
LI’s stock has declined 37.0% over the past three months.
LI’s weak prospects are apparent in its POWR Ratings also. The stock has an overall D rating, equating to a Sell in our proprietary rating system. LI also has an F grade for Stability, and a D grade for Growth, Value and Quality. In the same industry, the stock is ranked #43.
In addition to the POWR Ratings grades I've just highlighted, you can see the LI’s ratings for Momentum and Sentiment.
Click here to check out our Automotive Industry Report for 2021
VWAGY shares were trading at $31.27 per share on Wednesday afternoon, up $0.60 (+1.96%). Year-to-date, VWAGY has gained 49.98%, versus a 11.62% rise in the benchmark S&P 500 index during the same period.
About the Author: Samiksha Agarwal
Samiksha Agarwal has always had a keen interest in financial markets. This has led her to a career as a financial journalist. Through her extensive knowledge of fundamental analysis, her goal is to help investors identify untapped investment opportunities in the stock market.
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