Hop on Board the US Auto Revival
01/11/2011 10:11 am EST
The Big Two saw sales rise in 2010, and they expect to put more cars on the road this year. The stocks to buy to play this trend, though, are the big automakers' suppliers.
US automakers are back, baby. And so are their stocks.
For the year that just ended, automakers sold 11.6 million vehicles, an 11% increase from the 10.4 million sold in 2009. December vehicle sales in the US climbed to a 12.5 million unit annual rate. These gains come without help from Cash for Clunkers or any other government subsidy program. And they showed up while there have been relatively restrained incentives from the automakers themselves.
For the month of December, General Motors (NYSE: GM) saw sales climb by 8.5% from December 2009, and Ford Motor Co. (NYSE: F) saw sales grow by 6.8%. General Motors retained a leading 19.6% share of the US market and Ford jumped over Toyota Motor Corp. (NYSE: TM) to take the number-two slot with a 16.6% share. For the full year, General Motors saw a 6.7% climb in sales, and Ford's sales grew by 15.2%.
No wonder the price of Ford stock soared in 2010—up 67.9%. General Motors emerged from bankruptcy only recently. The company's November 18 initial public offering closed at $34.19 on its first day of trading. From that close to the close on January 6, the shares were up 13.8%.
But looking ahead, if you really want to leverage the recovery in auto sales, shares of General Motors and Ford aren't the best stocks to own. To get the most mileage from the auto industry, to really turbocharge your returns, to—well, you get the idea—you have to look at the shares of auto-industry suppliers.
Why Suppliers Are the Stocks to Buy
These shares have four things going for them (that's three more than the Big Two US automakers have on their side).
First, the advantage that Ford, GM, and their suppliers all share is, of course, the recovery in auto sales. If the auto industry is going to sell 13.5 million vehicles in the US in 2011, auto suppliers are going to sell a lot of mirrors, auto interiors, turbochargers, and braking systems, too.
Second, the continued consolidation of suppliers means that the best and the biggest will get bigger. In 2004, Ford sourced the stuff it needed to build its cars from 3,300 suppliers. By 2009, that figure was down to 1,650 suppliers, and of those, only 850 were eligible for new work. The goal at Ford is to reduce the number of suppliers to 750. Any company that survives that winnowing will wind up doing more business with Ford. Similar processes are at work at General Motors—and at auto suppliers around the world.
Third, new rules for increasing fuel efficiency and increased interest in safety features are boosting sales for the suppliers who specialize in these technologies. A big hunk of the higher prices that these changes will create will go to suppliers and not the automakers themselves.
And fourth, the biggest and best of these suppliers aren't captive to the US automakers. During the troubles in Detroit, they expanded their businesses outside the United States. And now, frankly, many of these suppliers don't care much what car companies win the global competition, because they do business with them all.
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For example, in 2000, 66% of BorgWarner's (NYSE: BWA) sales came from North America. In 2009, only 28% of sales were from the North America, 56% were from Europe, and 16% from Asia. The company's biggest current customers are Ford and Volkswagen (OTC: VLKAY). In January 2009, BorgWarner formed a joint venture with China Automobile Development United Investment, a consortium of 12 leading Chinese automakers representing about 90% of domestic passenger car production in China. The joint venture is scheduled to begin producing dual-clutch transmission modules this year.My Five Auto Industry Favorites
OK, so what suppliers do I like for 2011? In alphabetical order they are:
- BorgWarner is, in my estimation, the leader in turbochargers and dual-clutch transmissions, and a big winner from consolidation among auto suppliers. For example, the company is Ford's global turbocharger supplier for all its four-cylinder engines. BorgWarner's product portfolio gives it big exposure to efforts to increase fuel efficiency and reduce emissions. The company has invested during the downturn in new power train technologies to improve fuel economy. The shares sell for a forward price-to-earnings ratio of 18.2. That may sound high, but it is cheap given Wall Street's projections of 32% growth in earnings per share in 2011.
- Gentex (Nasdaq: GNTX) produces auto-dimming rearview mirrors and mirrors that incorporate rearview cameras that expand what drivers can see behind their cars. It's this last item that promises the biggest boost to Gentex sales, because on December 3, the National Highway Safety Administration announced plans to require rearview cameras in all cars by 2014. That proposal isn't final—and the stock has spiked on the speculation—but the rules would certainly add to a recovery in mirror demand from a 2009 low of 3.1 million exterior mirrors and 8.6 million interior mirrors. Sales in 2006 were four million exterior mirrors and 9.4 million interior mirrors. Standard & Poor's believes that the company has about an 80% share of the auto-dimming rearview mirror market. The shares trade at a forward price-to-earnings ratio of 28.75, thanks to the spike on the proposed rearview camera rule. Wall Street analysts put 2011 earnings per share growth at 14.3%.
- Johnson Controls (NYSE: JCI) gives you exposure to auto batteries—both traditional lead and the batteries for the hybrid market—and to auto interiors (the company also owns an energy equipment and management unit that should kick into high gear with any resumption in residential and commercial construction). Auto interiors accounted for 48% of sales in the fiscal year that ended in September 2010. The interiors unit has picked up business during the downturn as more automakers decided to buy seats rather than make them in house and as Johnson Controls expanded into Europe and China. Batteries account for about 14% of sales, and the company has a 36% share of the traditional lead battery market. Its recent acquisition of Delphi's battery business substantially boosted the company's position in China. In 2009 the company formed a joint venture with Saft (OTC: SGPEF) of France to produce lithium-ion batteries for hybrid and electric cars. The stock trades at a forward price-to-earnings ratio of just 13.5 on Wall Street projections of 19% earnings per share growth in 2011. Johnson Controls is a member of both my 12- to 18-month Jubak's Picks portfolio and my long-term Jubak Picks 50 portfolio.
- Magna International (NYSE: MGA) still has its Asia expansion ahead of it. About 47% of sales came from North America in 2009 and 49% from Europe. Within those markets the company supplies everybody: General Motors, BMW (OTC: BAMXF), Ford, Volkswagen, Daimler (NYSE: DAI), and Fiat/Chrysler (OTC: FIATY) each accounted for better than 10% of Magna's sales. Because of that lack of an Asia presence and worries about Magna's exposure to Fiat/Chrysler, the stock trades at just 12.6 times projected earnings per share on projected growth of 10.3%. If you're looking for a "pure play" among suppliers on the turnaround in the US market, Magna is a good way to go.
- TRW Automotive Holdings (NYSE: TRW) gets about 25% of its sales from auto safety systems, which is one of the sectors that I see growing faster than the auto industry as a whole over the next few years. (About 60% of 2009 sales came from chassis systems.) Sales in North America were just 25% of revenue in 2009, with Europe accounting for 58% and Asia 12%. The shares trade at a bargain nine times projected 2011 earnings per share, because Wall Street is pessimistic about the company's prospects. The consensus analyst estimate calls for just 4.1% earnings growth in 2011. That's such a low bar that I expect TRW to be able to beat it easily. Standard & Poor's is calling for revenue growth of 11% in 2011 and earnings-per-share growth of 6% for the year. While 6% may not sound like much, when the consensus is calling for just 4%, it represents a 50% positive surprise.
At the time of publication, Jim Jubak did not own shares of any of the companies mentioned in this post in his personal portfolio. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), owned shares of Johnson Controls as of the end of November. For a full list of the stocks in the fund as of the end of November, see the fund's portfolio here. The portfolio at the end of December will be posted in a few days.
Jim Jubak has been writing "Jubak's Journal" and tracking the performance of his market-beating Jubak's Picks portfolio since 1997 on MSN Money. He is the author of a new book, The Jubak Picks, and he writes the Jubak Picks blog. He is also the senior markets editor at MoneyShow.com.