In the intricate world of stock investing, the automobile sector represents an intriguing area for investment. Technological advancements and global market shifts drive the industry's dynamics, often leading to volatile stock movements. For sharp investors, this volatility offers a chance to find hidden gems: stocks that hold underrated value and show promise for significant growth. However, any experienced investor will tell you that to understand a company's value truly, you need a deep dive into its fundamentals.
Methodology for stock selection
To compile this list, I used the GuruFocus All-In-One Screener. I first screened for auto stocks. Then, I examined companies trading at valuations attractive compared to the rest of the industry. Next, I dived deeper into valuation metrics for a comprehensive analysis.
Now, let's discuss the metrics: price-earnings ratio, forward price-earnings ratio and price-sales ratio. These three have consistently showcased their importance in stock valuation. The price-earnings ratio, a timeless metric, relates a stock's current market price to its earnings per share, giving an insight into the valuation of each dollar of a company's current earnings. A lower ratio could suggest an undervalued stock. Yet, we should remember that transient factors can sometimes affect current earnings.
The forward price-earnings ratio gives insight into the market's expectations for a company's future earnings. By relating a stock's present market price to its projected earnings per share for the upcoming fiscal year, we often get a more transparent view of its likely value path.
On the other hand, the price-sales ratio, though not as popular as price-earnings, centers on a company's revenue. A consistent revenue flow can hint at a stable business in industries where earnings can fluctuate.
Using these metrics collectively can shed light on the real value opportunities in the auto sector, pinpointing stocks possibly trading beneath their true worth.
General Motors
For investors keen on dissecting the vehicles and parts sector, General Motors Co. (GM, Financial) presents an intriguing case. A glance at its price-sales ratio reveals a meager 0.27. In perspective, when stacked against a pool of 1,241 industry counterparts, GM drives ahead of 77.36% of them in valuation terms. Simply put, the market currently values every dollar of GM's sales cheaper than nearly four out of five competitors. While some might argue that a low price-sales ratio reflects potential business challenges, others could contend it is a flashing buy sign for value-oriented investors.
Recent performance and future prospects
Although its stock slid by roughly 20% in the last six months, the company's recent first-quarter results for 2023 present a glimmering hope for investors seeking undervalued stocks with future growth potential. Revenue surged to an impressive $44.75 billion, marking 25% year-over-year growth, while the net income leaped by 52% to touch $2.57 billion. In tandem with the company's raised full-year guidance, such promising figures highlight GM's operational efficiency and capacity to meet global automotive demand, even amidst economic downturns.
Strategic moves in EV and self-driving technology
Diving into the automotive trends, GM is not merely resting on its laurels. The company is making discernible strides in electric vehicles and self-driving technology, areas primed to redefine the future of mobility. The brand's commitment to hybrid technology and electric mobility is evident in its ambitious aim to churn out one million EV units annually by 2025. Furthermore, its significant stake in Cruise, an autonomous vehicle venture, sets it on a path to potentially rake in $50 billion in revenue by 2030. This aspiration, backed by the company's consistent research and development in automotive innovations and sustainability initiatives, underlines GM's adaptability to emerging markets and dedication to maintaining a competitive edge.
GM's position in the broader automotive industry
However, it's essential to acknowledge the broader context. The automotive industry, replete with barriers to entry and influenced by trade tariffs and regulations, requires brands to evolve continuously. GM, amidst this landscape, is focused on enhancing its brand loyalty and expanding its market share. Given its resilience, agility and the undeniable weight the brand holds in the automotive sector, one could argue that the road ahead seems promising.
Ford
Ford Motor Co. (F, Financial), an American auto behemoth, has showcased impressive numbers that underscore its inherent value. With a trailing 12-month price-earnings ratio of 11.6, Ford stands ahead of 65.07% of companies in its sector. This highlights a modestly priced earnings profile relative to many of its competitors. However, the forward price-earnings ratio, pegged at 6.34, is where Ford truly shines. This figure is more attractive than a whopping 85.80% of the industry, hinting at a brighter earnings outlook for the company.
Valuation and market position
Moving over to the price-sales ratio of 0.28 suggests a lean valuation in terms of its sales, bettering 77.03% of industry participants. In an industry driven by innovation and the constant push for sustainability, these valuation indicators suggest Ford might be overlooked.
Recent performance and earnings outlook
Over the past six months, Ford's stock has experienced a dip of 8%, which might deter the casual investor. Yet, a deeper dive into its recent earnings showcases an intriguing narrative.
In the second quarter, Ford posted revenue of $44.95 billion, marking an impressive surge of 12% year over year. Even more striking is its net income of $1.92 billion, a monumental 187% jump compared to the previous year. The company significantly outperformed expectations, beating its June earnings per share forecast by 34%.
Strategic initiatives in EV and digital technology
Delving into the broader automotive industry landscape, there's a palpable shift toward electric vehicles and hybrid technology. Ford, recognizing the future growth potential of this segment, is investing heavily in EV infrastructure. Its recent collaboration with South Korean companies to establish an $886 million EV battery materials plant in Quebec is a testament to this commitment. On the technological forefront, the company's recruitment of a former Apple executive to oversee its software subscription business signals its ambition to marry automotive innovation with digital prowess. Further, its burgeoning alliance with Chongqing Changan Automobile in the realm of new-energy vehicles highlights Ford's strategic maneuvers to solidify its footprint in emerging markets, especially amidst the constantly evolving automotive trends.
Factor in Ford's operational efficiency – evident from its recent restart of the F-150 Lightning production in response to rising demand – and it becomes evident that the company is well-positioned to capitalize on global automotive demand. With a robust research and development division, an unwavering commitment to sustainability and renowned brand loyalty among consumers, Ford might be one of the undervalued stocks to watch in the coming months.
