We recently compiled a list of the 7 Best Small Cap Automotive Stocks to Buy. In this article, we are going to take a look at where PHINIA Inc. (NYSE:PHIN) stands against the other small cap automotive stocks.
The International Automotive Industry
The automotive industry is one of the fastest-growing industries, especially with the recent surge in demand for Electric Vehicles (EVs) across the globe. According to a report published by Fintech Futures, the global automotive industry was valued at $4.4 trillion in 2024. The market is expected to grow at a compound annual growth rate of 5.66% to reach $6.7 trillion by 2032. The recent trend of EVs, autonomous vehicles, and innovative technology has revolutionized the automotive sector. The transformation is expected to boost auto revenues by nearly 30% during the projected period.
The international automotive industry market share has been changing drastically during the year. According to a CNBC report published on June 14, Chinese automakers have overtaken the US in terms of sales for the first time. Chinese automakers, led by BYD, sold 13.4 million new vehicles in 2023 surpassing 11.9 million vehicles sold by their US counterparts. On the other hand, the Japanese automotive industry stood undefeated by selling 23.59 million new vehicles during the same year. Moreover, China’s sales growth also outperformed that of the US. The country grew its automotive sales by 23% during the year as compared to a 9% growth by the US.
China has been focusing on growing its exports of the automotive industry to capture the international market. According to another CNBC report published on June 27 Chinese automakers are expected to achieve 33% of the global automotive market share by 2030. As of 2024, China has already captured 21% market share and sales of automobiles outside of China are expected to grow from 3 million this year to 9 million by 2030. Currently, around 59% of Chinese automotive sales come from within the country, with Russia being the largest market for Chinese automotive at 33%. If you want to read more about automotive industry trends you can look at the Top 18 Automotive Industry Innovations and Trends.
The US Automotive Industry Outlook
The United States is one of the key players in the international market. According to a report by Alliance for Automotive Innovation, the sales of new vehicles in the month of June dropped 3.4% year-over-year amounting to 1.32 million. The slow down in the sales is mainly attributed to higher prices and interest rates that hinder a stronger market. However, the full year sales estimates look better, with new vehicle sales expected to reach 16.1 million during the year, indicating a 12.4% increase from last year. On the other hand, on June 25 Reuters reported that uncertainty looms in the US automotive industry as the upcoming elections are expected to reshape the US economy. Cox Automotive reiterated its full year 2024 guidance at 15.7 million units.
The US consumer market has been reluctant to purchase vehicles due to inflation, and some shoppers are expected to keep holding back due to election uncertainty. As per Reuters, around 74% consumers and 81% dealers believe that inflation is the top concern and that the election is likely to influence it. This has led to a sell-off in auto stocks and many companies with strong fundamentals are now available at cheaper prices. With that, let’s now look at the 7 best small cap automotive stocks to buy.
Our Methodology
To compile the list of best small cap automotive stocks to buy we used Yahoo Finance and Finviz stock screeners. We set the market cap range between $250 million to $2 billion to get small cap stocks only. We checked auto manufacturers, auto and truck dealerships, and also auto parts for this article. Once we had a consolidated list of small cap automotive stocks, we selected and ranked the stocks that were the most widely held by institutional investors, as of Q1 2024. The list is in ascending order of the number of hedge funds holders for each stock.
Why do we care about what hedge funds do? 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).
A close-up of water and fuel pumping systems, with intricate electronic controls in the background.
PHINIA Inc. (NYSE:PHIN)
Number of Hedge Fund Holders: 37
PHINIA, Inc. (NYSE:PHIN) is a new company that came into being as a spin off from BorgWarner’s Fuel Systems and Aftermarket segments in 2023. The company has three main business segments namely Fuel Systems, Aftermarket, and Innovation. The Fuel Systems segment engages in designing and manufacturing of integrated components such as pumps, fuel injection systems, and engine control modules. These technologies increase efficiency and reduce emissions in vehicles. The Aftermarket segment of the company manufactures and sells products including starters and alternators. Lastly, the Innovation segment involves research and development of alternative fuel technologies and advanced engineering for a carbon free automotive industry. PHINIA, Inc. (NYSE:PHIN) sells its products to OEMs in the automotive industry and for other industrial applications.
The competitive edge of the company originates from over 100 years experience of BorgWarner in developing internal combustion engine products and its strong brand recognition. The company posted a profitable second quarter since its inception as a stand alone entity despite slower market conditions which affected its adjusted sales. PHINIA, Inc. (NYSE:PHIN) generated $863 million in adjusted sales slightly lower than the previous quarter due to soft market conditions. However, regardless of a slight decrease in sales, it maintained its profit margins and generated $117 million in adjusted EBITDA, with margins at 13.6% during the quarter. Margins were relatively strong for its Aftermarket and Fuel Systems segments, at 15.1% and 10.%, respectively, with the Fuel System segment benefiting from retroactive customer recoveries.
The company has done well to maintain a strong balance sheet during its transition period from its parent company to a stand alone entity. It has exited all transition service agreements and contract manufacturing agreements and is now completely independent. Despite the transition, the company ended the quarter with $339 million in cash on the balance sheet and generated an adjusted free cash flow of $108 million during the quarter, that too after returning $180 million to shareholders through dividends and share purchases.
Is PHINIA, Inc. (NYSE:PHIN) a good investment?
It’s too soon to say anything. However, the company has demonstrated its ability to generate solid margins amidst soft market conditions and management plans to leverage its brand and capabilities to drive long-term growth. Moreover, the company is also investing in hydrogen and alternative fuel products, which is in-line with the market trend. This along with a strong balance sheet as an independent company offers room for growth. The company presents an attractive entry point for investors as it is trading at 11 times its forward earnings, which is a 26% discount to its sector. Wall Street is also bullish on PHIN and 2 analysts hold a Strong Buy rating on the stock. The average price target of $52.5 represents an upside of 23.59% from current levels.
Overall, PHIN was held by 37 hedge funds that disclosed positions worth $200 million, at the close of Q1 2024.
Overall PHIN ranks 1st on our list of the best small cap automotive stocks to buy. You can visit 7 Best Small Cap Automotive Stocks to Buy to see the other small cap automotive stocks that are on hedge funds’ radar. While we acknowledge the potential of PHIN to grow, 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 PHIN but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.