Three Plays in the Auto Sector

02/23/2015 6:00 am EST


Richard Moroney

Editor, Dow Theory Forecasts

In his Upside newsletter, advisor Richard Moroney focuses on small- and mid-cap names, often ones overlooked by the market. Here, he reviews three stocks, each having specialty in an auto and transportation niche.

Gentherm (THRM)

Gentherm is a play on the growing demand for automobiles. Its specialty heating and cooling systems are used by automakers in seats, cup holders, steering wheels, and armrests.

For 2015, the consensus calls for per-share earnings of $2.14, up 14%. At 17 times estimated 2015 earnings, the stock seems reasonably valued considering the potential for positive profit surprises. Gentherm is a Best Buy.

American Axle & Manufacturing (AXL)

American Axle supplies drivetrain systems to major auto and truck makers. In a cyclical and typically slow-growth industry, American Axle has posted double-digit sales gains in three of the last four years. For 2015, the consensus per-share-profit estimate stands at $2.61, up 15%.

Shares have rallied 51% since spiking a low of $16.36 in mid-October. Yet, at 10 times trailing earnings, American Axle trades at a 14% discount to its three-year average P/E ratio and 40% below the median for auto parts makers in the S&P 1500 Index. American Axle is being initiated as a Buy.

Federal Signal (FSS)

Founded in 1901, Federal Signal is built around three attractive businesses serving government and commercial customers in more than 100 countries. The environmental solutions business (59% of sales for the nine months ended September) makes street sweepers and vacuum trucks.

An expanding global footprint, favorable trends in US municipal spending, and product launches bode well for near-term growth.

The stock earns an Overall score of 95, paced by a 90 in Earnings Estimates. An improved balance sheet and healthy cash flow should help sustain growth. For 2015, the consensus is $1.08, up 19%. Federal Signal, trading at only 14 times estimated 2015 earnings, is being initiated as a Buy.

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