The auto industry's recovery has outpaced that of the U.S. economy, and continues to gain solid ground. Despite the run-up in automotive stocks, there are three companies with the most potential, two of them relatively inexpensive. Ford Motor Company (F 2.35%) is the strongest of the Big Three, parts maker Lear (LEA 3.92%) is a growth story whose stock still is inexpensive, and engine maker BorgWarner (BWA 2.40%) is a pure play with a strong record.
Increasingly since the recession, millions of consumers have enjoyed the feeling of sitting in a new car. According to research firm Autodata, U.S. auto sales in October were roughly 15.2 million on an annual basis, an increase of 10.6%. While that pace is down from August's 16.1 million, likely due to the government shutdown, the end of the impressive growth does not appear to be in sight.
Economic catalysts such as an improving economy, increased consumer confidence, attractive financing rates and the return of the housing markets are all wind at the sector's back. Plus, the U.S. automakers continue to push out strong products that gained market share from their foreign competitors.
The three companies for investors to consider all have a specialness to recommend them.
Ford is one of the two largest U.S.-based makers of cars and light trucks. Its third-quarter results provided plenty of optimism in the name, with pre-tax profits increasing at a record $2.6 billion. The automaker has a strong North America business and a European unit struggling to return to profitability.
Ford reported earnings per share of $0.31 because of charges related to retooling the European operation and bolstering its pension assets. The earnings improvement came from continued strength in North American pickup sales ; as housing continues to improve, it is expected that this trend will continue. Ford is also improving the company's position in Europe, trimming losses losses to $228 million from $468 million in the year-before quarter. A return to profitability in the key growth market of Latin America also shows promise for future growth of the brand in emerging economies.
Bloomberg Businessweek estimates that Ford sold 8.5 million cars and trucks during the two years through August, while rival General Motors (GM 3.41%) sold 15.3 million and Chrysler (which Italy's Fiat controls) sold 3.4 million. But Ford handily eclipsed them in revenue per vehicle sold.
Ford's stock is up almost 53% from 12 months ago, outpacing the S&P 500's advance twofold. Still, the automaker's price-to-earnings multiple is a low 12, versus almost 16 for GM. Chrysler is not publicly traded, although Fiat is maneuvering to do an initial public offering for it.
Meanwhile, Ford pays a dividend of $0.40 per share, yielding 2.3%. GM has no payout. Ford was the only one of the Big Three not to need a federal bailout in the wake of the financial crisis.
Lear specializes in seating and electronics systems for cars. It reported solid third-quarter results with revenue and operating profits up near double digits. Earnings per share of $1.38 beat the prior-year period's $1.23. Lear drives the impressive numbers through continued commitment to key growth markets in Asia and South America, with global vehicle production up 3%.
The recovery in Europe and management's continued commitment to stock buybacks (it bought back 25% of its shares in the program starting in 2011) should continue Lear's impressive EPS growth rate of 20%.
Despite the stock's 80% climb over the past 12 months, it changes hands at around six times earnings. Lear's chief rival, Magna International, has a much higher P/E, 14.3..
Another auto parts maker to check out is BorgWarner, a leading maker of engines and power trains. It operates 56 manufacturing and technical facilities worldwide. Key growth segments are turbo chargers for large SUVs and diesel-supported engines, as well as thermal management systems to supply the growth in hybrid and electric car systems.
Despite the stock's current multi-year high and pricey P/E multiple of 20, BorgWarner's strong product pipeline, global footprint, and growth in emerging markets should continue the share price success for investors.
The closest competitor is Honeywell International, which trades at a similar multiple but is not an automotive pure play, given its interests in such segments as aerospace.
Since the auto industry's comeback, especially in the U.S., shows every sign of continuing, it makes sense to take advantage of it, riding the stocks that have the most robust results.
This article was syndicated by Advice IQ and edited by AdviceIQ’s editor-in-chief Larry Light. Henry J. Wheelwright, AAMS, is first vice president-wealth management and senior portfolio manager at UBS-Griffith Wheelwright Group in Rockland, Mass.
