This year's cyclical automotive upturn will likely stick around, supporting the profitability of complementary industries like parts suppliers in the process. Parts makers' earnings are mostly on pace to soar thanks to increased vehicle production and demand, and investors have accordingly boosted these companies' shares. But I believe there is still opportunity to gain from the positive momentum in this industry -- particularly in the case of these five stocks.
BorgWarner (NYSE: BWA ) operates through two segments. Its engine unit contributed 68% of June-quarter revenues, with its drivetrain division making up the rest. Its products in both divisions are mostly geared toward boosting engines' fuel efficiency and performance.
The company's management recently upped its 2013 share-net guidance to a range of $5.40 to $5.55, previously $5.15 to $5.45. This compares with last year's $4.97 result. It credits automakers' heightened focus on meeting tighter emissions standards for its better-than-expected performance.
In fact, last quarter represented a return to sales growth for both of BorgWarner's major operating segments. My belief is that the growth trend will persist through at least the next couple of quarters, partly thanks to the annualization of the earlier sale of its spark plug business that had formerly contributed about $80 million a year in sales. It sold that operation to Federal-Mogul during the second quarter of 2012. On that note, the sale already seems to be boosting BorgWarner's operating margin.
BorgWarner shares are a sound investment at their current forward P/E multiple of 15.4. They may entice those looking longer term, given the liquid balance sheet. As its long-term strategy, BorgWarner is focused on "new product development and strategic capital investments to enhance its product leadership strategy." At this time, cash is being used largely for capital spending and share buybacks.
Chassis supplier motoring ahead
TRW Automotive Holdings' (UNKNOWN: TRW.DL ) products consist of those related to brakes and steering systems. Additionally, in another division, it makes airbags, seatbelts and steering wheels. The Electronics division produces items related to safety, chassis, radio frequency, powertrain (energy producing) and driver assist functions. Finally, its Automotive Components unit makes body controls and engine valves, along with engineered fasteners and components.
TRW achieved a 16% share-earnings jump, on 6% revenue growth, in the recent June quarter. In addition to higher vehicle production, greater demand for safety products ignited sales growth.
The company stands out for its better-than-industry-average historical EPS growth (see ratios). It is also notable for its low long-term debt-to-equity ratio of 0.36 compared with the industry average of 0.72. TRW will likely continue to repurchase shares, supporting share net gains, given that it entered into an accelerated share repurchase agreement in May 2013, as stated in the latest 10-Q filing It is also spending to expand manufacturing capacity, particularly in Asia.
In all, TRW shares are an above-average selection for long-term price gains.
Rapid Sales Growth
Lear (NYSE: LEA ) is notable for its sales comparisons, as that measure climbed at a 12% clip in the quarter. Although costs related to transitions to new Seating programs restrained earnings in that period, earnings are likely to be back on track within the next several quarters.
To illustrate the importance of this Seating program, here's a breakdown of the company's segments:
1. Seating contributed 75% of total June-quarter revenues. The company produces complete automotive seating assemblies.
2. Electrical Power Management Systems was attributable for 25% of revenues. It manufactures electrical distribution systems and components.
Sales increases in the electrical business have been impressive, at 20% in the June quarter, a reflection of newly minted agreements, as well as rising production on existing contracts. It seems the company is well-positioned for a return to strong share-profit gains, supported in part by an aggressive buyback program.
Lear shares have climbed steadily for about a year, and are, nonetheless a good long-term buy and hold, based on expansion of the P/E multiple (currently 9.7 times forward earnings) over time.
WABCO Holdings (NYSE: WBC ) is a manufacturer of advanced braking, stability, suspension, and transmission control systems primarily for commercial trucks, trailers, and busses. Truck and bus products comprised 62% of 2012 sales, while Aftermarket products were 25% of the total, Trailer Products were 9%, and Car Products amounted to 4% of the total.
This company is highlighted by its robust pace of earnings gains, and the trend is likely to remain solidly upward. Sales are apt to climb 5% to 8% this year, allowing for EPS to increase in the high single digit percentages.
New agreements and the expansion of production in emerging economies, including Russia, Brazil, and China, are major components of the company's growth strategy. Meantime, it will focus on productivity gains.
I like this stock, once again, for its long-term price-appreciation potential. The forward P/E is 13.9, based on share earnings of $4.90 and $5.70 in 2013 and 2014.
A strong turnaround
Visteon (NYSE: VC ) is a conglomerate with subsidiaries involved in climate control, electronics, interiors, and automotive trim (fabrics and molding). It operates three business divisions:
1. Climate products comprised 62% of total 2012 sales.
2. Electronics offerings contributed 18% of the total.
3. Interiors offerings amounted to 20%.
The story here is new vehicle programs. Sales gains in the low double-digit percentages are stemming largely from new climate and electronics related agreements.
Visteon has been a beneficiary of strength at its two key customers, Hyundai and Ford, that together are attributable for more than 60% of total sales. It would likely fare well if these two entities continue to post growing sales totals.
In my view, Visteon shares are a good choice for 3- to 5-year price appreciation. Share earnings are likely to be boosted a bit by share buybacks, as well as sales gains.
These stocks may appeal to those looking for price gains over the next several years, as the automotive production upturn persists and possibly even accelerates. Keep an eye on sales growth trends, which I believe will run in tandem with automotive production. It will be interesting to note whether Europe's return to growth persists. If so, it could enable better performances at certain auto parts manufacturers.
After reviewing these five industry participants, the most enticing stock appears to be TRW,. Its safety product line should help it outperform the broader industry, and the company sports at relatively low forward P/E valuation of 9.1. A close second is BorgWarner, also operating in a sector -- emissions controls -- that ought to fare well in the long term.