Do Autos Still Have Room to Run?

06/22/2016 8:00 am EST


Richard Moroney

Editor, Dow Theory Forecasts

The best-run companies generate superior profits from their investments. One profitability metric gaining popularity, particularly among activist investors, is return on invested capital (ROIC) states Richard Moroney, editor of Upside Stocks.

ROIC typically equals earnings before interest and taxes (EBIT) adjusted for the corporate tax rate, divided by average invested capital (the book value of total debt plus shareholder equity minus cash and equivalents).

Importantly, ROIC can help uncover high-quality names among small-company stocks, including the following two small cap involved in auto and trucks.

Stoneridge (SRI), a maker of components for cars and trucks, sports a 12-month ROIC at 19%, compared to less than 10% a year ago.

The company owes much of its improved profitability to lower debt and surging tax-adjusted EBIT, up 46% over the last 12 months.

On March 30th, total debt stood at $121 million, down 41% from two years earlier. With an expanding customer base, Stoneridge stands ready to benefit from growth in global vehicle production.

March-quarter adjusted earnings per share were $0.31, up 82% and $0.08 above the consensus. Sales were unchanged at $162 million, below the consensus of $173 million. But revenue rose 5% adjusted for currency fluctuations.

Gross profit margin rose one percentage point, and operating margin more than doubled to 5.2%. For 2016, Stoneridge forecasts per-share earnings of $1.10 to $1.30, implying at least 18% growth.

Stoneridge, with a quality score of 89 and a top Overall score of 99, has been upgraded to our “best buy” rating.

Wabash National (WNC) sports a trailing ROIC of 22% — more than double the level in 2013 and well above the average of 12.6% for industrial stocks in the S&P 1500.

A leading maker of semi-truck trailers, Wabash boosts strong positions across several growing markets, including dry vans and refrigerated trucks.

The company is benefiting from a strong replacement cycle because of aging fleets. Encouraging trucking fundamentals, including near-record tonnage, should help sustain growth.

Industry trailer shipments this year are expected to reach 298,000 units, down 3% from 2015 but 27% above 2013 levels.

In mid-May, Wabash said full-year earnings per share should range from $1.65 to $1.75, implying at least 11% growth. Management targets sales of $2 billion, matching last year.

By 2020, Wabash said per-share earnings should approach $2.50. At eight times trailing earnings, shares trade 51% below the median for S&P 1500 heavy-equipment and truck manufacturers.

The stock’s five-year average P/E is 19. Wabash National, with a quality score of 98 and maximum overall score of 100, is rated best buy.

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By Richard Moroney, Editor of Upside Stocks