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Tesla Is Overvalued: 5 Auto Stocks to Buy Instead

Zacks

Tesla TSLA has been in the news this month because of its announcement of a self-driving truck/trailer that many expect will be a game changer for the logistics market and that people will have to book years in advance to be among the first to get their hands on it.

Others, however, remain more concerned about Tesla’s immediate problems, which involve churning out required volumes of its Model 3 that launched earlier this year with a host of pre-orders. Tesla has very optimistic production targets and expects to ship 500,000 cars in 2018 (400,000 of which are expected to be of the Model 3). But reasonable estimates point to around half that number, so there’s a good amount of skepticism about its ability to deliver.

At any rate, TSLA shares have appreciated 86.5% over the past year compared to just 16.9% for the S&P 500.


Its price-to-book value has remained significantly higher than the S&P 500 throughout this period although the current level of 9.7X is off its own high point of 12.3X during the period. The S&P 500 is currently at a more sober 4.3X, which is closer to its own high point over the past year.

Tesla has uncertain cash flows, so the chart below shows a huge multiple of price to cash flows of over 55X.

So Tesla is a risky bet with a whole lot of ideas and some great technology, but a limited capacity to deliver on its promises. As such, we think it’s a good idea to take a wait and see approach to the stock as indicated by its Zacks Rank #3 (Hold) rating.

The truth is, there are plenty more fish in the sea. All of the ones discussed below for instance have a Zacks Rank #1 (Strong Buy) (see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here) and VGM Score A. The VGM (value-growth-momentum) score indicates the preferred investment style and a high score generally indicates that the concerned stock can be selected irrespective of your preference for a particular style. In short, these stocks are for everyone!

Honda Motor Company Ltd. HMC

Honda manufactures a wide range of products, including motorcycles, ATVs, generators, marine engines, lawn and garden equipment and automobiles. Historically, Honda has been a leader in fuel-efficiency and low-emission technology.

The company has topped estimates in each of the last four quarters at an average rate of 69.2%. Earnings estimates for the year ending March 2018 and 2019 have increased 9.8% and 8.4%, respectively in the last 2 months.

Revenues show an upward trend since the December 2015 quarter. Earnings jumped 121.3% in the last quarter after languishing for a while. Revenue is currently expected to increase 2.4% this year and 4.0% in the next. Earnings are expected to grow 6.4% and 6.8%, respectively.

HMC shares are down 1.3% from a year ago.

The price-to-earnings (P/E) ratio based on forward 12 months earnings at 8.8X is well below the 19.5X for the S&P 500 and off its own median value of 10.0X over the past year.

The price-to-sales (P/S) ratio of 0.4X, while close to its own median value over the past year, is significantly lower than the 2.9X for the S&P 500.

The price-to-cash flow (P/CF) ratio of 4.3X significantly trails the 19.4X for the S&P 500 and is also below its own median value of 5.3X.

Volvo AB VLVLY

AB Volvo is the parent company of the Volvo Group, which is a manufacturer of trucks, buses, construction equipment, diesel engines, and marine and industrial engines, including financing for these vehicles. The Volvo Group also provides a range of services including insurance, rental, spare parts, preventive maintenance, service agreements, assistance and information technology (IT).

The company topped estimates in three of the last four quarters at an average rate of 7.9%. Earnings estimates for the year ending December 2017 and 2018 have increased 19.8% and 10.3%, respectively in the last 2 months.

Revenues have started showing a positive trend in the last three quarters and are finally back to the levels they were in 2015. Earnings are showing a positive trend in the last four quarters and are the highest they have been in a long time. Revenue is expected to increase 7.6% this year and 3.0% in 2018. Earnings are expected to grow 51.3% and 11.7%, respectively.

VLVLY shares are up 62.8% over the past year with a sharp jump in April.

The P/E ratio based on forward 12 months earnings at 14.8X, trails the S&P 500 and is below its own median value of 15.08X over the past year.

The P/S ratio of 1.0X is however at the high end of the range it has traded in over the past year, although significantly lower than the S&P 500.

The P/CF ratio of 7.9X significantly trails the S&P 500 and is close to its own median value of 7.8X.

Denso Corp DNZOY

Kariya City, Japan-based Denso Corporation sells automotive supplies, systems and components in the areas of thermal, power train control, electric, electronics, and information and safety. Some of its products include body electronics, hybrid vehicle components, automatic identification products, industrial robots, programmable logic controllers; and products that provide engine management, climate control, driving control and safety.

Jeffries is the only known broker house covering the stock, so there aren’t a whole lot of estimates to go on. But it’s important to note that the company has topped all estimates provided in the last four quarters by an average of 28.7%. This is probably what led to a sizeable increase in estimates for both the December and March quarters.

Revenue growth shows an upward trend since the June quarter of 2015 although earnings tend to be a bit erratic, jumping in one quarter only to drop off somewhat in the next. Both revenue and earnings are currently expected to grow at a mid-to-high single digit percentage rate for the years ending in March 2018 and 2019.

DNZOY shares are up 20% over the past year, stronger than the S&P 500.

The P/E ratio based on forward 12 months earnings at 14.3X, trails the S&P 500 and is marginally below its own median value of 14.5X over the past year.

The P/S of 0.9X, while trailing the S&P 500 is, however, above its own median value of 0.8X. The P/CF of 8.0X tells the same story.

Toyota Motor Corp TM

Toyota Motor Corporation produces, sells, leases and repairs passenger cars, trucks, buses, boats, airplanes and other products in Japan and most other countries. The company is also has real estate, civil engineering, insurance and other businesses.

Toyota has topped estimates in each of the last four quarters at an average rate of 28.3%. Earnings estimates for the year ending March 2018 and 2019 have increased 8.6% and 7.2%, respectively in the last 2 months.

Revenues trended up since the June 2015 quarter although there was a sharp dip in the last quarter. While earnings have fluctuated widely, they shot up significantly in the last quarter to the highest level in more than three years. Both revenue and earnings are currently expected to grow in the low single digit percentage rates in 2018 and 2019 fiscal years.

TM shares are down 0.7% from a year ago, so well below the S&P 500. The gap has widened from the start of this year.

The P/E multiple based on forward 12 months earnings, at 10.3X is well below the S&P 500 although close to its own median value over the past year. The P/S of 0.7X and P/CF of 5.4X tell the same story.

Meritor Inc. MTOR

Troy, Michigan-based Meritor, formerly ArvinMeritor, supplies drivetrain, mobility, braking and aftermarket solutions to commercial truck, trailer, off-highway, defense, and specialty and aftermarket customers around the globe.

The company topped estimates in three of the last four quarters at an average rate of 21.9%. Earnings estimates for the year ending September 2017 and 2018 have increased 19.7% and 9.2%, respectively in the last 2 months.

Revenue has picked up strongly in the last two quarters after a negative trend that lasted more than two years. Earnings don’t always follow the same trend as revenue, but have also picked up strongly in the last two quarters. Revenue this year is currently expected to be flat with the previous year and grow nearly 9% the following year. Earnings are expected to grow 3.5% and 18.3%, respectively.

MTOR shares are up 104.2% over the past year.

The P/E ratio based on forward 12 months earnings at 10.9X, trails the S&P 500 but is above its own median value of 9.6X over the past year. The P/S of 0.6X and P/CF 3.2X tell the same story.

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