As reported by TipRanks, Morgan Stanley recently released a report, in which in which it pointed out major changes in the automotive industry, mainly due to China’s growing production capabilities. The firm mentioned that China is now making 9 million more cars than it sells, which is shaking up competition in the Western market.
Due to this, the bank has downgraded its assessment of the U.S. auto industry from Attractive to In-Line. The change reflects rising vehicle inventories in the U.S., affordability challenges for consumers, and an increase in credit defaults among less-than-prime borrowers.
On a brighter note for car dealerships, the bank upgraded several franchise dealer stocks to Overweight.
The firm believes that worries about franchise dealers have diminished, especially compared to the challenges faced by automakers linked to China and their electric vehicle investments. The perspective shows a shift in attention, as China moves from being a source of demand to one of surplus supply, impacting global automotive trends.
Moreover, in another report by the bank named “The Future of Cars,” the firm discussed that advancements in technology are projected to drive a rise in software-defined vehicles (SDVs), potentially making up 90% of vehicle production by 2029 and dominating the market by 2040.
SDVs will feature improved computing power that allows for remote updates similar to smartphone apps, which could lead to an expected increase in chip spending of approximately $15 billion over the next five to six years.
However, the path to widespread SDV adoption will involve challenges. Manufacturers need to make sure these vehicles are viewed as safe, addressing cybersecurity concerns and redesigning traditional vehicle architectures. By consolidating multiple functions into fewer high-performance processors, automakers can streamline designs and support advancements in automation and self-driving technology.
Long-Term Perspective on EV Industry in the West
Like every other industry in the 21st century, the auto industry is also evolving and the most common topic of discussion is the EV industry. While the industry has grown significantly over the last few years, it has experienced a slowdown recently due to several factors including slow growth of infrastructure and higher prices compared to ICEs.
In a recent interview with CNBC, Christian Kames, managing director of Lazard, addressed concerns from European automakers about declining demand for electric vehicles and potential reductions in electrification plans.
He suggested that these worries might be overstated, as the automotive industry is undergoing a significant transformation, with new technologies often facing initial hype followed by periods of disappointment.
Kames acknowledged the current lack of demand and insufficient charging infrastructure but highlighted that global initiatives are being implemented to improve EV infrastructure and technology investments. He expressed confidence that electrification will ultimately succeed. He suggested that European manufacturers need to keep investing to maintain competitiveness in the long run.
When discussing future leaders in the EV market, Kames recognized the rising competition from Chinese brands but argued that it is too soon to discount Western automakers. He emphasized that all major car companies are aware of the ongoing transformation and are taking action to adapt, which will be crucial in the next few years.
Apart from electrification, autonomous vehicles are the next big thing. According to Precedence Research, the global market for autonomous vehicles was valued at approximately $158.31 billion in 2023 and is expected to reach around $2.75 trillion by 2033. This represents a compound annual growth rate of 33% from 2024 to 2033.
Our Methodology
For this article, we used stock screeners to identify over 70 auto manufacturers along with auto and truck dealership stocks. Next, we narrowed our list to 7 stocks with forward price-to-earnings ratios below 15 and the highest average analyst price target upside, as of October 4. The most undervalued auto stocks are listed in ascending order of their average analyst price target upside. We also added the hedge fund sentiment around each stock which was taken from Insider Monkey’s database of 912 hedge funds as of Q2.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Top 20 Motorcycle Brands in the World
A fleet of motorcycles and vehicles lined up in an assembly line with workers in the background.
Honda Motor Co., Ltd. (NYSE:HMC) is a Japanese multinational conglomerate, mostly recognized for its automobiles, motorcycles, and internal combustion engines. While the company has a remarkable portfolio of ICE and hybrid vehicles, the company has solid plans to become a major EV producer. With average price target upside of 25.62%, it is the 3rd most undervalued auto stock to buy.
The company is committed to achieving full electrification by 2040, aiming for all global sales to come from BEVs and Fuel Cell Electric Vehicles (FCEVs). Despite a perceived EV slowdown, the company expects a steady shift toward EVs in the coming years.
To stay competitive, especially against emerging Chinese manufacturers, Honda (NYSE:HMC) is focusing on the full EV lifecycle, including battery value chains, production technology, and charging infrastructure. It plans rapid EV launches by 2026 and aims to strengthen its EV brand by 2030 while using its ICE business to fund future electrification efforts.
According to Honda Report 2024, the company will invest 10 trillion yen (1 Yen = US $0.0068) in electrification and software by 2031, with 3.5 trillion yen allocated by 2026 and 6.5 trillion yen after that. These funds will support competitive EV development, reduce costs, and build a vertically integrated EV value chain.
Moreover, shareholder returns, including dividends of over 1.3 trillion yen from 2022 to 2026, will remain a priority, with share repurchases used to improve capital efficiency. Honda (NYSE:HMC) is focused on achieving a return on invested capital of 10% or higher by 2031 as it transitions from ICE to EVs.
It plans to generate 12 trillion yen in cash flows by March 2026 and more in the following five years, driven by internal combustion engine and EV growth.
In the short term, the company is aiming for an operating income of 1.42 trillion yen and a 7% revenue on-sales target, for the fiscal year ending March 31, 2025. Shareholder returns will include a dividend of 68 yen and a 300 billion yen share repurchase.
Overall HMC ranks 3rd on our list of the most undervalued auto stocks to buy according to analysts. While we acknowledge the potential of HMC as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than HMC but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
