It's fair to say the auto parts sector hasn't been in favor for a while. Global passenger car production hasn't grown year over year since 2017, and the semiconductor shortage ensured that light global vehicle production (LVP) will only increase by around 1.2% in 2021. That said, leading industry observer IHSMarkit expects LVP to increase by 9% in 2022.
With the industry set for a multi-year recovery beginning in 2022, it's time to look at auto parts manufacturers Autoliv (ALV 1.98%) and Magna International (MGA 2.90%), and automotive coatings company Axalta Coating Systems (AXTA 0.54%).
With AutoNation, America's largest automotive retailer, reporting a whopping 18% increase in same-store sales in its most recent third quarter, it's clear that demand for automobiles is there. The problem is supply and the ability of automakers to ramp production in the face of semiconductor shortage. That said, most industry observers expect that problem to ease in 2022, resulting in the production increase discussed earlier.
That's great news for airbags, seatbelts, and steering wheel manufacturer Autoliv. The case for buying the stock is not only based on a multi-year recovery in LVP; Autoliv also has an opportunity to grow more than its end markets.
Management believes it can grow by 4% more than global LVP from 2022-2024, so for example, with a worldwide LVP growth of 9% in 2022, Autoliv could grow at 13%. After the initial bounce in LVP takes place, Autoliv is expecting 4% to 6% growth from 2024 onwards.
The company's growth aspirations come from grabbing market share -- it's already the dominant player in its end markets and has a track record of winning in the marketplace. For example, 65% of sales come from airbags and steering wheels, where it commands 42% and 37% market shares, respectively. The remaining 35% of sales come from seatbelts, where Autoliv has a 44% market share. According to SEC filings, Autoliv had a compound annual growth rate (CAGR) for passive safety products of 4.4% from 1997-2020, compared to LVP CAGR of just 1.3%. In doing so, Autoliv's overall market share increased from 27% to 42%.
In addition, the increasing emphasis on safety (passenger-side airbags, higher-value steering wheels, active seatbelts, etc.), not least in driverless cars, means Autoliv can increase the amount of its content on a vehicle.
Trading on 16.5 times Wall Street analyst expectations for free cash flow (FCF) in 2022, Autoliv is an attractive stock for long-term investors.
This auto products and systems company had products on two of three cars launched in 2019, and its customer list reads like a "who's who" of the auto industry. Moreover, its product range spans the whole vehicle. Magna offers solutions from body exteriors and structures to power and vision, and seating.
Of course, the range of products can be seen as a blessing and a curse simultaneously. For example, it's no secret that automakers are embarking on a long-term shift toward hybrid and electric vehicles (EV) from traditional internal combustion engines (ICE). Unfortunately, that's something that could challenge long-term prospects for Magna's ICE transmission systems, fuel tanks, and four-wheel-drive systems.
That said, the overwhelming majority of Magna's sales (lighting, seating, mirrors, body, etc.) are agnostic to shift. Moreover, a larger part of sales (compared to the "at-risk" sales) come from products (eDrives, battery enclosures, sensors) that are beneficiaries of the shift from ICE to EV. Meanwhile, management continues to invest in electrification technologies to prepare for the transition.
Trading on just 14.3 times Wall Street analyst expectations for FCF in 2022, Magna International is another excellent value option for investors.
Axalta Coating Systems
Last but not least, Axalta Coating Systems offers investors an under-the-radar way to play a recovery in LVP and beyond. The coatings company has heavy exposure to the automotive market. Around 40% of its sales come from the refinish market, 23% from the light vehicle market, and 7% from the commercial vehicle market, with the rest coming from its industrial coatings business.
As such, the case for buying the stock rests on the marginal growth opportunity in the light and commercial vehicle original equipment market (OEM) coming from an increase in LVP. Moreover, the reopening of the economy should lead to more miles driven, and in turn, more accidents and collisions, creating an increased demand for refinish coatings. Axalta is the leading player in the refinish market and the No. 2 player in the light vehicle OEM market.
Unfortunately, all the leading painting and coatings companies suffered from a combination of soaring raw material costs and supply chain issues in 2021. Still, those headwinds could turn into tailwinds if those issues get ironed out in 2022.
Trading on just 15.1 times Wall Street analyst expectations for FCF in 2022, Axalta is another excellent value option for investors.