Many investors are cautious about investing in the automotive industry for multiple reasons. Perhaps investors are hesitant after the recent recession which forced General Motors and Chrysler into bankruptcy, or perhaps the idea of investing in a cyclical industry seems too daunting. However, there are definitely great automotive investments, outside of the traditional major global automakers, that many investors overlook: here are three to consider.
Daniel Miller: Polaris Industries (NYSE:PII) is a great automotive company that's often overlooked by investors because it isn't a traditional vehicle manufacturer, it isn't a dealership group selling passenger cars, or parts supplier to major automakers.
Rather, Polaris has carved out a niche within the power-sports market and is most known for its off-road vehicles such as ATVs, snowmobiles but also produces traditional motorcycles as well as a unique three wheeled Slingshot.
Polaris has focused on designing innovative products – halfway through 2015 over 75% of Polaris' sales were from products designed within the past three years – to take significant market share from competitors since the recession.
What really caught my eye about Polaris was its ability to translate product success into financial success – something that isn't guaranteed.
Last year Polaris' return on invested capital, or ROIC, checked in at 42% which was far ahead of its peer average of 14% and the S&P 500 average of 6%. Management is also focusing on improving operations with its Lean initiative that focuses on shorter lead times and faster product turn time, which will drive increased profitability. Polaris' revenue compound annual growth rate (CAGR) over the past five years has been higher than 20% and if management continues to design quality products and enter new markets overseas, the company should be well poised to reward investors over time.
John Rosevear: Few American investors have heard of Japan's Fuji Heavy Industries (NASDAQOTH:FUJHY). Fuji Heavy is the corporate descendant of a company that once made aircraft for Japan's military. Fuji Heavy still makes some aircraft and helicopter parts for military use. But nowdays, most of its income comes from a subsidiary that you have heard of: Subaru.
By global automaker standards, Subaru is pretty small. It's not even in the top fifteen automakers by sales. Mighty Toyota (which owns a stake in Fuji Heavy, by the way) out-sold it by more than 10 to 1 last year. It has just three assembly plants -- two in Japan and one in the United States. And it isn't planning a big expansion, in China or anywhere else.
Why not? Because CEO Yasuyuki Yoshinaga is very, very careful with his shareholders' money. The company has what is probably the best return on equity in the industry -- and an operating profit margin well ahead of most of its bigger rivals'. That makes Fuji Heavy -- Subaru -- an intriguing company, and maybe an intriguing investment.
It's not exactly cheap, though with a price-to-earnings ratio of about 11.5, it's not especially expensive, either. As you can see, the stock has boomed over the last three years.
Really great, financially solid, well-managed industrial companies aren't exactly common. If buying and holding great companies for the long term is your kind of thing, Fuji Heavy is worth a closer look.
But you've almost certainly heard of Kenworth, Peterbilt, and if you're in the U.K. or Europe, DAF. PACCAR is the company which owns all of these major names in heavy-duty vehicles like class 8 big rigs, dump trucks, and delivery trucks, just to name a few. Furthermore, PACCAR is one of the super-heavyweights of the industry, with 28% market share in North America, and a 15% share in Europe.
Besides being dominant and relatively unknown, what makes PACCAR a great investment?
To start, this is one of the best-run companies you'll find. Over the past several years, management has done a remarkable job of keeping costs low while the heavy-duty truck market was slow to recover from the recession, and those steps have paid off in huge ways with heavy truck sales rebounding over the past year-and-a-half:
Over the same period, the company's stock has underperformed the market measurably. For buyers, though, this has created an excellent buying opportunity:
While the stock has sold off this year – it's down more than 25% since late 2014 – the company's performance has been great, and as you can see above, its price to earnings multiple, as well as enterprise value to EBITDA, have fallen.
In short, the stock is borderline cheap today. Factor in a trucking market that's in the early stages of a recovery, and PACCAR is a great investment that most people will walk right past.