Once Clunkers, Auto Stocks Are Now Clicking

12/23/2013


The U.S. sold the last of its 60% stake in General Motors ($42; GM) earlier this month, closing the latest chapter for an industry known for soaring booms and near-fatal busts.

The North American auto industry entered the 2008-2009 recession in a bloated and weakened state. Vehicle sales in the continent had declined in both 2006 and 2007. The Big Three — GM, Ford Motor ($17; F), and Chrysler — were beset by overcapacity, hefty debt loads, and slim profit margins. The government pumped more than $80 billion into GM, Chrysler, and auto suppliers during the recession.

Today, the slimmed-down automakers are thriving. Global auto sales rose 6% to a record 77 million vehicles in 2012 and are on pace to approach 80 million vehicles this year. In North America, sales have jumped more than 35% from their 2009 low but are still below prerecession levels. Capacity in North America has steadily risen since 2010 but remains 12% below its 2006 peak. For the Big Three, capacity is about 30% below 2006 levels. Prices of new vehicles in the U.S. have steadily drifted higher over the past four years.

LIGHT-VEHICLE SALES
Year-To-Date Sales
-------- Through November --------
Manufacturer
Sales
YOY
Chg.
(%)
Market
Share
(%)
General Motors
2,555,921
9
18
Ford Motor
2,268,644
12
16
Toyota Motor
2,045,199
8
14
Chrysler
1,639,361
9
12
Honda Motor
1,390,057
8
10
Nissan
1,138,662
9
8
Hyundai Motor
657,778
2
5
Kia Motors
501,548
(3)
4
Subaru
384,511
28
3
Volkswagen
373,689
(5)
3
Mercedes-Benz
298,509
13
2
BMW
271,891
11
2
Total light 
vehicle sales *
14,239,897
8
* Includes manufacturers not listed
Source: www.motorintelligence.com.

Two auto-parts makers in particular have been buoyed by the resurgence: Magna International ($80; MGA) and Lear ($83; LEA), both rated Focus List Buy and Long-Term Buy.

Magna builds an array of automotive systems, as described below. It has grown sales more than 5% in 16 straight quarters, while operating cash flow has risen in five of the past six. Production sales in North America have outpaced overall vehicle production due to an improved product mix.

Absent attractive expansion and takeover opportunities, Magna uses its excess cash to repurchase shares. Last month, management said it plans to repurchase up to 12 million shares, or roughly 5% of the stock count, in the next year. Buybacks shaved 2% from the share count in the first nine months of 2013.

MAGNA INTERNATIONAL
% Of
9-Mo.
Sales
Year-
Over-
Year
Growth
(%)
Business Segments
External production *
83
11
Complete vehicle assembly
9
22
Tooling, engineering, other
8
25
Total
 $25.7 billion 
13
* Includes, in order of volume: exterior and interior, body and chassis, powertrain, vision and electronics, closure
Geographic Regions
North America
52
9
Europe
41
15
Rest of World
7
26
Major customers: General Motors (19% of sales), Fiat/Chrysler (15%), BMW (13%), Ford (12%), Volkswagen (12%).

Lear claims to be the second-largest player in the $55 billion global market for automotive seats, with a share slightly above 20%. Management says its seating business (74% of sales for the first nine months of 2013) could see profit margins compress in early 2014. But Lear says seating margins should reach 6% for full-year 2014 and eventually top out at 7% over the long haul, up from 5% in the first nine months of 2013. Lear also supplies electrical systems, a segment that includes wireless products such as remote keyless entry, lighting, and sound systems. The electrical-systems unit (26% of sales) has taken market share from larger suppliers while also benefiting from automakers cramming more electronics into cars. Lear will provide its 2014 outlook in January.

Like GM and Chrysler, Lear filed for bankruptcy in 2009. Lear emerged from Chapter 11 proceedings in November of that year. Today, Lear's balance sheet looks solid, with $884 million in cash versus long-term debt of $1.06 billion. Long-term debt equals 27% of capital, well below Lear's 80% rate at the end of 2006.

LEAR
% Of
9-Mo.
Sales
Year-
Over-
Year
Growth
(%)
Business Segments
Seating
74
7
Electrical power
26
20
Total
 $12.0 billion 
10
Geographic Regions
North America
38
7
Europe & Africa
38
9
Asia
17
14
South America
6
34
Major customers: General Motors (21% of sales), Ford (20%), BMW (11%).

Executives at both Lear and Magna say Europe has bottomed out. But the shrunken market in Europe has so far offered few signs of encouragement. Vehicle registration, a proxy for auto sales, has declined in 25 consecutive months. In the first 10 months of 2013, registrations declined 9% on a year-to-year basis in Italy, 7% in France, and 5% in Germany; the U.K. bucked the trend with 10% growth. Citing economic conditions in Europe and South America, Ford warned Dec. 18 of lower-than-expected profits in 2014.

Analysts don't see trends in Continental Europe reversing soon because of high jobless rates and weak population growth. Also, cars have lost some luster as status symbols.

Despite the soft market, Magna delivered 15% higher sales in Europe for the nine months ended September. Lear's sales grew 9% in Europe and Africa, regions facing tighter profit-margin pressure than the rest of the world. However, Lear's electrical unit has fattened margins by expanding into Eastern Europe and deeper into Africa in recent years.

The Asia-Pacific auto market continued to grow through the recession and now is twice the size of North America, with growth especially strong in China. Magna's emerging-market operations have lost money, but recent trends are encouraging. The company has opened new factories in China, Serbia, and Turkey and is beginning to see strong growth in China and India. Lear has greater exposure to emerging markets, particularly in Asia and South America, which have driven 2013 growth.

Two small-caps and a midcap from our sister newsletter Upside also have significant exposure to the auto industry. Gentherm ($25; THRM) designs thermal systems for car seats, cupholders, and steering wheels. Shiloh Industries ($22; SHLO) supplies metal products used for automotive powertrains, seats, fenders, hoods, and doors. Visteon ($79; VC) builds climate systems, electronic controls, and interior components used by nearly all automakers.

AUTOMOBILE-RELATED STOCKS
The Forecasts recommends two auto-parts makers (listed in bold), while our sister newsletter, Upside, recommends three stocks from that group. None of the four automakers we monitor are recommended for purchase. Ford Motor and Volkswagen are rated A (above average) while GM and Toyota earn B (average) ratings.
------ 12-Month Change ------
Est. EPS
Growth,
Fiscal
2014
(%)
-------- Quadrix Scores --------
Company (Price; Ticker)
Market
Value
($Mil.)
Trailing
P/E
Ratio
Forward
P/E
Ratio
Earnings
Per
Share
(%)
Sales
(%)
Cash From
Operations
(%)
Momen-
tum
Value
Overall
Auto Parts & Equipment
Gentherm ($25; THRM) 
863
30
24
38
17
(38)
22
71
62
93
Lear ($83; LEA)
6,670
14
14
15
9
26
26
91
82
99
Magna International
($80; MGA)
17,821
12
12
12
12
26
18
85
88
98
Shiloh Industries
($22; SHLO) 
375
21
18
36
11
12
30
96
56
91
Visteon ($79; VC) 
3,824
12
14
118
8
(10)
(21)
83
67
93
S&P 1500 Auto Parts
& Equipment Average
8,381
21
19
6
4
18
16
63
50
70
Automakers
Ford Motor ($17; F)
64,689
10
10
24
10
7
11
78
86
92
General Motors ($42; GM)
57,684
13
12
NA
2
(8)
37
48
65
68
Toyota Motor ($119; TM)
204,518
14
NA
42
(15)
11
NA
76
78
82
Volkswagen ($51; VLKAY)
75,261
6
NA
(57)
13
73
NA
51
96
93
Note: Quadrix scores are percentile ranks, with 100 the best.     NA Not available.

 


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