Profitable Alternatives To Tesla Are In Japan

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Includes: HMC, HNDAF, NSANF, NSANY, TM, TOYOF, TSLA
by: Cash-Centered Creep
Summary

Tesla is an unprofitable company with uncertain long-term prospects.

Japanese automotive firms such as Honda, Nissan, and Toyota are more attractive stocks than Tesla.

All three are undervalued, Tesla is anything but.

While much hullabaloo surrounds Tesla, Inc. (TSLA), better stock offerings in the auto sector can be found in Japan - specifically: Honda Motor Co., Ltd. (HMC) (OTCPK:HNDAF), Nissan Motor Co., Ltd. (OTCPK:NSANF) (OTCPK:NSANY), and Toyota Motor Corporation (TM) (OTCPK:TOYOF). All of these Japanese motor companies are more likely to provide better total return to investors than Tesla could ever hope to.

The Tesla Problem

Why is Tesla so unlikely to deliver such total returns? At first glance, this claim does seem unlikely, given that Tesla's year-over-year revenue growth for 2018 Q1 was 26.4%. Furthermore, Tesla's annual revenues have been increasing steadily, but also note the annual net income figures.

Year Revenue ($) Net Income ($)
2013 2.01 billion -74.01 million
2014 3.2 billion -294.04 million
2015 4.05 billion -888.66 million
2016 7 billion -674.91 million
2017 11.76 billion -1.96 billion

This is nothing new - Tesla has never been a profitable company, but the likelihood of that changing in the near term is slight at best. The company is highly leveraged, with a debt-to-equity ratio of 2.02, and simply cannot generate profit at present. Its negative free cash flow margin of -30.9% and negative free cash flow yield of -7.09% attest to its unprofitability.

Image taken from mondovo.com

Tesla bulls will point out that the unprofitability is a consequence of the costs of rapid expansion, and has allowed for growth opportunities that a more fiscally conservative approach simply would not yield. The recent announcement that their second car assembly plant will be built in Shanghai is one such growth opportunity, as it could potentially enable Tesla to better capitalize on the Chinese market, which is projected to see 7 million electric vehicles in use by 2025.

However, this is undermined by the fact that such spending requires more cash that the company is not earning, and thus has to either incur debt or engage in share dilution to obtain. Neither of these approaches serves investors' interests, but the company's negative FCF margin and negative FCF yield leaves it with no other options.

Undaunted, the bulls will point to its hold on pole position in fully electric vehicle revenue. Indeed, this month Tesla hit 200,000 deliveries of electric vehicles within the U.S., which has triggered a phaseout of $7,500 worth of federal tax credit which will be available for the remainder of 2018. It is the first automotive firm to deliver this many electric vehicles - though of course, as Tesla only sells electric vehicles, this is in itself unsurprising.

However, this overlooks the fact that well-capitalized automotive firms such as Ford (F) and General Motors (GM) are capable of financing alternatives to the Tesla Gigafactories, and possess both the expertise and the production lines to begin focusing on electric vehicles. These facts undermine the strength of the competitive advantage that Tesla does have at present, and calls into question its long-term viability, as does questions about the reliability of its figures.

Looking To The Far East

Other competitors that are overlooked in this regard stand out as attractively valued automotive investments at this time - some of which are based in the Land of the Rising Sun. The three most prominent Japanese automotive firms - Honda, Nissan, and Toyota - all look more promising long term than Tesla, and all are looking into the electric vehicle market: Honda with its Clarity Electric model, Nissan with its award-winning 2018 Nissan Leaf, and Toyota with its Prius Prime hybrid are all threats to Tesla in the electric vehicle market.

The fact that these companies are foreign should not deter interested investors. At present, the Japanese stock market overall is one of the more attractively valued major global markets, and company earnings drive share prices. Consumer cyclicals such as automotive firms comprise the second largest market sector on the Nikkei, around 20.9%. As company earnings are currently outpacing share prices, future growth potential appears promising.

For those Americans who might be leery of investing in Japanese stocks, it is worth noting that Japanese Prime Minister Shinzo Abe has brought in several policies which will have the effect of bolstering shareholder rights, including a Corporate Governance Code which ensures that corporate decision-making must make investor interests a primary concern.

Additionally, bear in mind that while all three companies are headquartered in Japan, their operations are global. They make money in every developed market in the world, and are significant players in many emerging markets as well. In short, to invest in these companies is not to invest solely in the Japanese automotive market.

Finally, if investors would rather not invest directly on the Tokyo Stock Exchange, that is not an issue. All three companies sponsor the ADRs available to American investors (HMC for Honda, NSANY for Nissan, and TM for Toyota), so none of the ADRs are problematic - even Nissan's, despite it trading on the Pink Sheets.

As to the aforementioned companies, it may prove helpful to look at each of these in more depth.

Japanese Automotive Firm 1. - Honda Motor Co., Ltd.

Company Overview

Founded in 1946, Honda Motor Co., Ltd. is a firm which develops, manufactures and markets automobiles, motorcycles, and power products globally. Honda's automobiles use diesel engines, gasoline engines of three cylinder, four cylinder or six cylinder, gasoline-electric hybrid systems and gasoline-electric plug-in hybrid systems. Honda's motorcycles possess engine displacement classes ranging from 50 cubic centimeters to 1,800 cubic centimeters. Honda also manufactures power products such as brush cutters, generators, grass cutters, lawn mowers, riding mowers, snow blowers, tillers, and water pumps.

Competitive Advantage

Honda has a reputation for consistently producing reliable products of high quality. It is also excellent in marketing its products, to the point where Kelley Blue Book has been able to award seven of its twelve "Best Buy" categories to Honda products.

Image taken from motorcycle-logos.com

Nobody buys Hondas because of flash new designs or exotic sounding brand names. The reputation that Honda has for producing reliable automotive vehicles is sufficient to ensure that a Honda customer will continue to buy Hondas when the time comes to replace their existing product. This customer loyalty and repeat custom accounts for Honda's success. And in the electric car market, Honda will seek to use that reputation for consistency to ensure that their Clarity Electric model, which was launched in the U.S. in December 2016, will be a great success.

A look at the revenue and net income figures for Honda over the past five years testifies to how profitable their business model is.

Honda's Revenue and Net Income Figures 2014-2018

Year Revenue (¥) Revenue ($) Net Income (¥) Net Income ($)
2014 12.51 trillion 111.3 billion 624.7 billion 5.56 billion
2015 13.33 trillion 118.6 billion 509.44 billion 4.53 billion
2016 14.6 trillion 129.9 billion 344.53 billion 3.06 billion
2017 14 trillion 124.5 billion 616.57 billion 5.49 billion
2018 15.36 trillion 136.6 billion 1.06 trillion 9.4 billion

Honda's profitability can also be gleaned from its dividend record: it has paid dividends to shareholders since at least 1987, as far as I can check, and has paid consecutively rising dividends since 2014. Only companies that make money are in a position to distribute dividends to their shareholders, and the length of time Honda has been able to do this is proof of its long-term profitability.

Valuation

Currently, Honda is trading in the high-$20 range with a price-to-earnings ratio of 5.46, and offers a dividend yield of 3.12%. The current P/E is lower than the stock's own five-year average P/E of 12.68, the automobiles industry average of 9.54, and the S&P 500 (SPY) average of 24.91. Furthermore, the current dividend yield is higher than the five-year average yield of 2.50%. It would seem, therefore, that Honda is undervalued - but by how much?

Earnings per share over the past twelve months was $5.34, and EPS growth over the next five years is estimated to be 22.90% annually. Using an 11% discount rate - the stock market average - I calculate fair value for Honda to be $192.12. The stock is currently undervalued by 85%!

Japanese Automotive Firm 2. - Nissan Motor Co., Ltd.

Company Overview

Founded in 1933, Nissan Motor Co., Ltd. manufactures and sells automotive products and marine equipment, and divides its operations into automobiles (manufacturing and selling vehicles and parts) and sales financing (providing sales finance services and leasing to support automobile sales activities).

Nissan's manufacturing operations are spread across twenty countries worldwide, including their Japanese home market, and their products and services are offered in over 160 countries. The sixty models which Nissan sells are marketed under the Datsun, Infiniti, and (of course) Nissan brands.

Competitive Advantage

Nissan is a well-established player in the automotive industry, and benefits particularly from its strong R&D spending with strategic partner Renault SA (OTCPK:RNLSY) (OTC:RNSDF). The $5.6 billion that was pumped into R&D yielded the sale and delivery of 300,000 Nissan LEAF's by January 2018 worldwide, making it the best selling electric vehicle cumulatively to that date.

Image taken from insideevs.com

Nissan's general automotive expertise makes it a very profitable company overall, as its revenue and net income figures illustrate.

Nissan's Revenue and Net Income Figures 2013-2017

Year Revenue (¥) Revenue ($) Net Income (¥) Net Income ($)
2013 10.5 trillion 93.4 billion 389.03 billion 3.46 billion
2014 11.4 trillion 101.4 billion 457.6 billion 4.07 billion
2015 12.2 trillion 108.5 billion 523.8 billion 4.66 billion
2016 11.7 trillion 104.1 billion 552.8 billion 4.92 billion
2017 11.95 trillion 106.3 billion 746.9 billion 6.64 billion

Nissan is thus not only profitable enough to continue investing heavily in R&D without adversely impacting the company's financial position, but is also able to reward shareholders with dividends, as it has done since at least 1994.

That trend is set to continue going forward - the alliance with Renault, which was established in 1999, has enabled Nissan to grow its market share in both established markets and emerging markets.

Country Market Share
Brazil 9.8%
China 5.3%
France 30%
Germany 7.4%
Japan 11.7%
Mexico 27.6%
Russia 32.3%
Spain 18.3%
United Kingdom 9.9%
United States 8.5%

Valuation

Currently, Nissan is trading in the high-$10 range with a price-to-earnings ratio of 6.50, and offers a dividend yield of 4.40%. The current P/E is lower than the five-year P/E average of 9.04, the automobiles industry average of 9.54, and the S&P 500 average of 24.91. Furthermore, the current dividend yield is higher than the five-year average yield of 3.40%. Thus, Nissan also seems undervalued, but by how much?

Earnings per share for the past twelve months was $3.45, and EPS growth for the next five years is estimated to be 38% annually. Using an 11% discount rate - the stock market average - I calculate fair value for Nissan to be $214.06. The stock is thus undervalued by 92%.

Japanese Automotive Firm 3. - Toyota Motor Corporation

Company Overview

Founded in 1937, the Toyota Motor Corporation is an automotive industry player which also conducts business in finance and other industries. Toyota designs, manufactures and sells commercial vehicles, minivans and passenger vehicles and its products are sold in approximately 190 countries. It also provides financing to deals and their customers in respect of purchasing or leasing Toyota vehicles.

Competitive Advantage

Toyota has the most valuable automotive brand in the world, with a brand value of $29.9 billion.

Automotive Brand Brand Value ($)
Toyota 29.9 billion
Mercedes-Benz 25.68 billion
BMW 25.62 billion
Ford 12.74 billion
Honda 12.7 billion
Nissan 11.43 billion
Audi 9.63 billion
Tesla 9.42 billion
Maruti Suzuki 6.38 billion
Volkswagen 5.99 billion

This brand strength is an immense competitive advantage for Toyota, and is a key reason as to why it is the fifth-largest company in the world by revenue. The revenue and net income figures for the past five years show just how profitable it truly is.

Toyota's Revenue and Net Income Figures 2014-2018

Year Revenue (¥) Revenue ($) Net Income (¥) Net Income ($)
2014 25.69 trillion 228.5 billion 1.82 trillion 16.2 billion
2015 27.24 trillion 242.3 billion 2.17 trillion 19.3 billion
2016 28.4 trillion 252.6 billion 2.31 trillion 20.5 billion
2017 27.62 trillion 245.7 billion 1.83 trillion 16.3 billion
2018 29.38 trillion 261.4 billion 2.49 trillion 22.2 billion

Furthermore, Toyota is the global market leader in hybrid electric vehicle sales, having sold 10 million hybrid passenger car models by January 2017. And they have set their sights on ensuring that there will be electric versions of every one of their vehicle models by 2025, with a view to selling 5.5 million electric vehicles by 2030. In short, Toyota intend to be a big player in the electric vehicle market going forward, and they are more than capable of being just that. They are also capable of rewarding shareholders with dividends, having made regular distributions to shareholders since at least 1995.

Valuation

Currently, Toyota is trading in the high-$120s with a price-to-earnings ratio of 8.58 and offers a dividend yield of 3.39%. The current P/E is lower than the stock's five-year average P/E of 10.81, the automobiles industry average of 9.54, and the S&P 500 average of 24.91. Furthermore, the current dividend yield is higher than the five-year average yield of 2.85%. This indicates that, just like Honda and Nissan, Toyota is presently undervalued. Once again, by how much?

Earnings per share over the past twelve months were $15.06, and EPS growth over the next five years is estimated to be 7.00% annually. Using an 11% discount rate - the stock market average - I calculate fair value for Toyota to be $286.91. The stock is currently undervalued by 55%!

Overall Final Thoughts

As profitable companies, Honda, Nissan, and Toyota all have the ability to reward their shareholders with dividends, and have track records going back to the early 1990s. Needless to say, Tesla is in no position to reward its shareholders with dividends at this time, and whether or not it ever can is a matter of debate.

All three Japanese firms are trading at much lower valuations than Tesla's forward price-to-earnings ratio of 117.56 - a valuation for a company with no profit that makes it, not Amazon (AMZN), a strong contender for being labelled 'The Most Overhyped Company In The World' (Amazon's stock is wildly overpriced, but the company is at least profitable). By contrast, Honda has a P/E ratio of 5.46, Nissan has a P/E of 5.35, and Toyota has a P/E of 8.58.

In summary, Honda, Nissan and Toyota are profitable, attractively valued, dividend paying companies which are likely to use their automotive expertise to take a significant share of the electric vehicle market. And this will be a detriment to unprofitable, overvalued Tesla, for which a lot has to go exactly right for it to justify its current valuation. The outlook in that respect does not favor Tesla, and investors would be wise to give serious consideration to either Honda, Nissan, or Toyota (or all three) instead as long-term automotive investments.

DISCLAIMER: The author is not a financial professional and accepts no responsibility for any investment decisions a reader makes. This article is presented for information purposes only. Furthermore, the figures cited are the product of the author's own research and may differ from those of other analysts. Always do your own due diligence when researching prospective investments.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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