To say the least, 2023 was a challenging year for auto manufacturers. That said, these issues limited upside, creating some undervalued auto stocks to buy.
Indeed, last year was tough operationally for auto stocks. First, elevated interest rates squeezed subprime buyers out of the auto market, leaving only high-income, high-credit-quality buyers. The second challenge was the United Auto Workers strike, which created uncertainty.
However, as we progress through 2024, the outlook for these undervalued auto stocks is improving. The union strike came to a positive resolution. And if anything, as long as unemployment remains below 4%, demand for autos will be resilient. Furthermore, with the Federal Reserve stating that rate hikes are unlikely, the financing environment could improve.
These undervalued auto stocks are still too cheap and present substantial upside for the rest of the year. They are generating significant free cash flow and using it to buy back stock.
Stellantis N.V. (STLA)
The parent company of Peugeot, Chrysler, Dodge, Maserati and Jeep is one of the most undervalued auto stocks. According to Finviz, it trades at a forward price-to-earnings of 4 and a trailing price-to-free cash flow of 5.
Stellantis N.V. (NYSE:STLA) is coming off another great year financially. For fiscal year 2023, it reported revenue of €189.5 billion ($204.5 billion), representing 5% year-over-year growth. Adjusted EPS also grew 7% YOY to €6.42 ($6.93).
Despite the labor strike headwinds in 2023, industrial free cash flow generation was robust. The car maker generated about €12.9 billion ($13.9 billion) of free cash flow. Moreover, it returned a substantial portion, about €6.6 billion ($7.1 billion), in dividends and buybacks.
Although Q1 sales were disappointing, falling 12%, the company plans to increase its battery-electric vehicle offerings. In 2024, it estimates it will add 18 BEVs, bringing its global portfolio to 48. Furthermore, the company sees double-digit adjusted operating income and positive industrial free cash flow.
Lastly, the company committed to an expanded capital return program on releasing full-year results on February 15. It set a €3 billion open market stock buyback and increased the dividend by 16%.
General Motors (GM)
After delivering outstanding results recently, this Detroit automaker has garnered investor interest. Indeed, after topping revenue, EBIT and EPS estimates and issuing favorable guidance, General Motors (NYSE:GM) stock is one of the undervalued auto stocks to buy.
Based on Q1 2024 results, General Motors is firing on all cylinders. The top line grew 7.6% YOY from $39.9 billion to $43 billion. Net income also saw a huge lift from $2.3 billion to $2.9 billion. As a result, net income margins improved from 6.0% to 6.9%.
Even better, the company issued guidance that surpassed Wall Street’s expectations. It raised its net income guidance to a range of $10.1 billion—$11.5 billion, above the previous outlook of $9.8 billion—$11.2 billion. It also raised its FY2024 adjusted diluted EPS to $9.00 – $10.00.
The impressive results and guidance led to several favorable notes. Analyst Vijay Rakesh from Mizuho raised the price target to $52 based on General Motors’ leadership in SUVs and pickup trucks. He also called out the disciplined electric vehicle rollout. UBS also reiterated its “buy” rating and raised the price target to $58, stating it was one of the best stories in autos.
Considering the rosy fundamentals, GM stock is one of the undervalued auto stocks today. At just 5 times forward earnings, it’s dirt cheap and has substantial upside.
Toyota Motor (TM)
Although Toyota Motor (NYSE:TM) has been highly criticized for hesitancy in investing in electric vehicles, its strategic bet on hybrids is paying off. EV demand has slowed in 2024, but demand for hybrids, where the Japanese automaker is a leader, is surging.
Indeed, Toyota’s fortunes have improved as consumer skepticism of EVs has heightened. It’s one of the largest sellers of hybrid vehicles globally and is seeing significant demand. As a result, TM stock is already up 26% year-to-date.
The strength of Toyota’s product line is unmatched and results show it. For instance, March 2024 U.S. vehicle sales increased to 214,894 units, a 21.8% YOY growth rate. It is offering more electrified options that include hybrid powertrains to meet customer needs. As a result, electrified vehicle sales increased 36.4% to 78,157.
Going forward, the automaker will capitalize on hybrids. It plans to launch more than 20 editions with hybrid powertrain support. These new options suit consumers who prefer the flexibility of hybrids.
Toyota Motor’s success in hybrids reflects the industry of the Japanese. For now, it is maintaining its lead in the auto market and its hybrid strategy is succeeding. At 10 times forward EPS, it’s one of the most undervalued auto stocks to buy.
On the date of publication, Charles Munyi did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
