TSLA - Mazda: Strengthening Cash Position Favorable Long-Term Growth Prospects

• Mazda has seen a strengthening of its cash position in the last year, as evidenced by a higher quick ratio.
• Rollout of the CX-60 and CX-70 models could prove to be a favorable growth catalyst.
• Notwithstanding the risk of short-term downside, I take a long-term bullish view on Mazda.

Investment Thesis: A strengthening cash position as well as potentially favorable sales prospects for the CX-60 and CX-70 models could serve as a catalyst for further upside.

Mazda Motor Corporation ( MZDAY , MZDAF ) is a major Japanese automaker which sells automobiles worldwide - with half of net sales within the Japanese market in the most recent quarter and half in international markets.

Encouragingly, the stock has continued to see upside in 2022, in spite of challenging macroeconomic conditions.

The purpose of this article is to determine whether Mazda Motor Corporation could continue to see upside from here based on recent performance and the broader business outlook.

Performance

From a cash standpoint, Mazda's quick ratio (cash less inventories all over total current liabilities) has improved over the last year - indicating that the company is in a better position to meet short-term liabilities:

Source: Figures sourced from Mazda Motor Corporation Financial Results - March 2022. Quick ratio calculated by author.

Long-term loans payable were also down by nearly 20% over this period, which was encouraging.

Additionally, when looking at net sales, we can see that while sales continued to increase in the company's home market of Japan - sales growth across North America was also in the double-digits:

In terms of potential valuation relative to earnings, we can see that the P/E ratio is now slightly lower than that seen pre-2020 and EBITDA per share has also rebounded to prior levels seen during this period.

From this standpoint, the stock seems to be trading at an attractive value relative to earnings, and I envisage that the stock is in a good position for further upside if we continue to see earnings growth from here.

Looking Forward

With inflation and higher fuel prices a major concern for the world economy heading into the latter half of this year - there is a possibility that the company might see some short-term pressure on sales - as consumers potentially defer automobile purchases until the broader economic situation becomes more stable.

With that being said, the fact that half of the company's sales are domestic could work in Mazda's favor in the short to medium term. With the Bank of Japan taking a less restrictive monetary policy compared to its Western counterparts - i.e., keeping interest rates low at a time the Federal Reserve and ECB are raising rates to combat inflation - this could encourage Japanese consumers to continue automobile purchases while the cost of credit remains low.

However, the consequences of a weak yen might prove to be a double-edged sword, as a weaker currency could add to the cost of production by making the sourcing of materials from abroad more expensive. This, coupled with existing supply chain bottlenecks exacerbated by prior COVID-19 lockdowns in China and the ongoing situation in Ukraine, could mean that Mazda finds it difficult to meet existing demand due to production shortages.

With the Mazda CX-60 in production across Europe, Japan, and other markets along with the CX-70 set to be rolled out across North America soon - this marks Mazda's first plug-in hybrid offering.

Although the company will invariably face more competition from companies such as Tesla ( TSLA ) and Ford Motor Company (F) which have more firmly established themselves within the U.S. electric vehicles market - this might still mark a good opportunity for Mazda to capture a slice of this growing market. With 5% of U.S. vehicle sales now fully electric, I envisage that demand for hybrid models will increase further as a growing number of consumers seek to gradually transition.

Should the CX-60 and CX-70 models significantly bolster worldwide sales due to the hybrid offering, then this could be a catalyst for the upside.

Conclusion

To conclude, Mazda Motor Corporation has seen encouraging sales growth and cash performance in spite of a challenging macroeconomic environment. While there could be significant macroeconomic pressures ahead, I take the view that the stock could continue to see longer-term upside from here.

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