Now that automotive-industry companies Goodyear (GT 1.30%), Magna International (MGA 0.86%), and Autoliv (ALV 2.36%) have released their fourth-quarter earnings, investors can reassess their growth prospects for 2022 and beyond, and determine if they look like good values. In all three cases, I think the answer to this question is "yes" -- investors looking for auto industry exposure should find these companies' stocks attractive.
There are three main arguments in favor of picking up these stocks:
- After a challenging few years that featured slowing production of light vehicles globally, followed by the pandemic and a chip shortage that further hindered manufacturing, automakers are set to increase production over the next several years as these issues ease.
- Although light vehicle production should grow in the low single-digit percentages after the recovery period, the transition to electric vehicles (EV) offers significant growth prospects for suppliers that offer EV-relevant products.
- The stocks are trading at good values and have margin expansion prospects from a potential decrease in raw material prices.
Goodyear: A stock to buy on the dip
All three of the above arguments apply to the tire maker. In addition to the recovery in vehicle production benefiting its sales to automakers, Goodyear's replacement tire sales -- which account for around 80% of its total revenue -- will get a boost from a rebound in miles driven as our behaviors return to something closer to their pre-pandemic norms.
Furthermore, management is ramping up its capital spending to develop more new tires designed to meet the specific needs of electric vehicles, and to differentiate its products from competing brands.
Unfortunately, according to management, the extra outlays that this will require, combined with the need to build up inventory so that it can rapidly fulfill future orders, means that Goodyear will be operating at a cash flow breakeven in 2022. While that's disappointing on a superficial basis, this year's inventory adjustment is probably a one-time occurrence. Meanwhile, its investments will fuel growth as the integration of its Cooper Tire acquisition progresses
ahead of schedule. As such, Goodyear's underlying free cash flow generation will remain strong. According to Wall Street analysts, its earnings will rise from $2.09 per share in 2021 to $3.04 per share in 2023, putting it on a 2023 price-to-earnings ratio of less than 6.
Magna International: Preparing for an electric vehicle future
I've discussed this auto parts manufacturer's end-market exposure and its increasing relevance to the EV market in other articles. But, in a nutshell, most of its products are either agnostic to the shift from internal combustion engines to EVs, or will benefit from the change. Meanwhile, Magna International management continues to invest in EV-friendly products like advanced driver assist systems (ADAS), electric drive units, and EV battery enclosures.
Magna is highly relevant as an EV play, and its revenues, margins, and earnings are set to expand as light vehicle production rises. The table below shows the guidance that its management gave on its recent fourth-quarter earnings call. If it hits the high end of its forecasts, Magna's earnings before interest and taxes (EBIT) will almost double from 2021 to 2024.
|Metric||2021||2022 (Forecast)||2024 (Forecast)|
|Light vehicle production, units (North America, Europe, and China)||53.6 million||57.9 million||67.7 million|
|Magna revenue||$36.2 billion||$36.2 billion||$44.6 billion to $47.1 billion|
|Adjusted EBIT margin||5.7%||6% to 6.4%||8.1% to 8.6%|
|Adjusted EBIT||$2.1 billion||$2.3 billion to $2.6 billion||$3.6 billion to $4.1 billion|
Autoliv: Safety is becoming ever more important
Global light vehicle production was already weak in 2019. Then along came the pandemic. And now, there's also the semiconductor chip shortage limiting production.
The weakness in production in recent years has been bad news for automakers and bad news for Autoliv, which makes airbags, seat belts, and steering wheels. The company holds a whopping 40%-plus share in the passive safety market, so its fortunes are inextricably linked to those of the automakers.
To add insult to injury, soaring raw material costs and supply chain issues are squeezing Autoliv's profit margins.
With all that in mind, it should be no surprise that the company's 2021 revenue of $8.23 billion was $448 million less than its 2018 revenue. And its operating profit dropped from $908 million to $683 million over the same period.
That said, nearly all these headwinds look set to dissipate and be replaced with tailwinds relatively soon. Chipmakers are spending vast amounts to ramp up their manufacturing capacity, demand for new cars remains very strong, and global light vehicle production is set to bounce in 2022 and keep growing after that. Meanwhile, a reopening economy should help ease supply chain issues and rectify the imbalances in supply and demand, which could send raw material prices back down.
All told, management believes Autoliv's organic sales will grow by 20% in 2022, and Wall Street thinks the company will generate $460 million in free cash flow. Meanwhile, Autoliv is embarking on a multiyear expansion in sales and margin based on increased light vehicle production and higher customer demand for safety features like airbags. Given that it's trading as a valuation of less than 20 times estimated 2022 free cash flow and has strong earnings growth prospects over the next few years, Autoliv looks like an excellent value stock.