Why Auto Parts Stocks Are a Must-Buy for 2022

It's been a difficult few years for the auto industry. Global light vehicle production declined from 2017 to 2020, and the bounce in 2021 was restrained due to the ongoing pandemic and severe supply chain shortages. However, all this is setting up a scenario where production can grow on a multiyear basis.

In particular, auto parts companies with exposure to faster-growth hybrid and electric vehicles (EV) like Autoliv (ALV 0.59%) and Magna International (MGA 0.26%) can do well. Here's why.

Image source: Getty Images.

Demand is high

There's little doubt that the underlying demand for cars is strong. Soaring used and new car prices reflect the demand/supply imbalance right now. For example, the CEO of the largest U.S. automotive retailer, AutoNation's Mike Jackson, said on the company's last earnings release:

Demand continues to outpace supply for new vehicles. New vehicle sales are constrained by reduced production volume with low inventory levels. We expect this pent-up demand to support sales for the foreseeable future.

AutoNation's used-vehicle same-store revenue rose by a whopping 53% on a year-over-year basis in the third quarter, compared to flat performance from new-vehicle same-store revenue growth on the same basis.

Demand for new vehicles is there, but supply is not. However, industry forecasters such as IHSMarkit expect a 9% bounce in global light vehicle production in 2022. Unfortunately, semiconductor shortages will impact the industry "at least until 2023," according to IHSMarkit. Still, there's strong evidence that many supply-chain issues are easing, and production will increase accordingly.

Auto-chip supply is coming

It takes time for new semiconductor capacity to come online, but there's no doubt that it will come. For example, the Semiconductor Equipment Association of Japan forecasts substantial increases in capital spending on semiconductor manufacturing equipment.

Data source: Semiconductor Equipment Association of Japan.

In addition, the largest producers of automotive chips, including Infineon and NXP, are gearing up to increase production. For example, Infineon, the largest auto-chip maker, plans to invest 2.4 billion euros in its fiscal 2022, a figure significantly ahead of the 1.5 billion euros invested in fiscal 2021 and the 1.1 billion euros in 2020.

It's a similar story at NXP, where management plans to make capital expenditures equivalent to more than 8% of revenue in 2022, compared to a 2010 to 2020 average of 5.3%.

These investments, and more, will feed into increased auto-chip supply over time, leading to increased light vehicle production and more revenue for Autoliv and Magna International.

So what about Autoliv and Magna International?

I like these two stocks because they will benefit from increased vehicle production. They can grow more than the market because they have products that can either benefit from increased EV production or not suffer due to a slowdown in internal combustion engine (ICE) vehicle production. There are plenty of options available if you are looking for an attractive EV growth stock to buy, but Autoliv and Magna represent good value stock options. 

Autoliv is a global leader in air bags, seat belts, and steering wheels and plays on the growing emphasis on car safety. Its market share in the passive safety market stands at a mighty 42%, and management plans to carry on increasing market share while benefiting from increased auto production and an increase in content per vehicle. 

Image source: Getty Images.

Magna International's products include those agnostic to a shift to EV production, such as body exteriors, lighting, seating, and mirrors. Meanwhile, its advanced driver assistance systems, battery enclosures, and electric drive systems will benefit from trends in EV production. In addition, management is investing heavily in electrification solutions and expects to double its electric vehicle-related sales between 2023 and 2027.

Good value stocks

Moreover, based on Wall Street analysts' estimates, both stocks are good values. This table shows enterprise value (market cap plus net debt) to earnings before interest, taxation, depreciation, and amortization (EBITDA) for the two stocks. A value of around 11 times EBITDA is typically seen as fair value for a mature stock, so both stocks look a good value right now.

Data source: marketscreener.com

All told, the supply chain issues will get sorted over time, and now looks like a great time to gain exposure to a long slow recovery in auto production.