Forget Ford, GM: Buy these 6 stocks instead

Auto sales are booming, and these shares are the best way to profit.

By InvestingAnswers Mar 11, 2013 6:31PM

By Michael Vodicka


Americans still have a healthy obsession with cars, and that love affair was on display last week, with February car sales beating the most optimistic projections for the second month in a row while rising to their best level in more than four years. According to research firm Autodata, annual sales, a closely followed industry benchmark, rose to 15 million units in 2012, the best pace since 2008, before the financial crisis crushed demand and threw the industry into turmoil.


Clearly, in spite of rising gasoline prices and the payroll tax increase from the fiscal cliff, cars are still quite popular, taking priority over a debt payment or vacation for many Americans.

 

And that passion is creating an opportunity for investors to profit.


An easy route to take when you're investing in the automobile industry would be buying stocks like Toyota (TM) and Ford Motor Co. (F). But automakers are vulnerable to the whims of consumers. Old models can fall out of favor quickly, and new models require heavy investments in research and development.


That's why my favorite way to invest in the booming auto industry is with auto-parts makers. Parts companies offer two distinct benefits over the automakers.


The first is pricing power. While a huge bevy of manufacturers compete for limited consumer dollars, frequently leading to pricing wars and margin erosion, there are fewer parts specialists for manufacturers to choose from. This gives parts makers more pricing power and margin strength than the carmakers.


The second benefit is diversification. Parts companies sell their components to every car manufacturer under the sun. This means their balance sheets don't rest with the success of last year's best seller or this year's hottest new model. Selling to a wide swath of car manufacturers protects parts makers from manufacturer and car-specific risks.


While parts companies are less known than high-profile automakers, there are plenty of good stocks to choose from.


Here are my top six:




From this group, TRW Corp. (TRW) and Dana Holding Corp. (DAN) stand out because of their bullish growth projections and attractive valuations.


TRW Automotive Holdings Corp.

TRW supplies auto systems, modules and components to automotive original equipment manufacturers (OEM). With car sales booming shares have been hot, up a market-beating 32% in the past year. These gains have been fueled by impressive earnings growth, with the company beating earnings estimates by an average of 8.5% in the last four quarters.


Looking forward, analysts are projecting annual earnings growth of about 9.5% in the next five years. And in spite of this bullish growth projection, TRW still looks a bit undervalued, with its forward P/E (price-to-earnings) ratio of 9 below its 10-year and peer average of 10.


Dana Holding Corp.

The company designs and manufactures drive line products and technologies for vehicle manufacturers worldwide. Despite the company's more than 100-year history, dating back to 1904, Dana is the smallest company on the list -- with a market cap of just $2.6 billion. Dana has also been benefiting from renewed strength in auto sales, with shares climbing 21% in the past six months. Analysts are calling for earnings growth of 9% in 2013 and another 11% in 2014. Its projected five-year growth rate of 12% is ahead of the projected industry average of 11%.


Dana also has value, trading with a forward P/E (price-to-earnings) ratio of 9, below its peer average of 11. And when you throw in its 1.2% dividend yield, Dana is a solid pick to capitalize on resurgent car sales.


Risks to Consider: Higher payroll taxes and gasoline prices have created some uncertainty around discretionary consumer spending. Although sentiment has been holding up well so far, that could change heading into summer if gasoline prices continue to rise.


Action to Take: Car sales continue to rebound from their epic collapse during the financial crisis of 2008, almost back to peak levels of 16 million annual units. But even though car manufacturers are benefiting from the trend, the best way to capitalize is by investing in auto-parts manufacturers. With more margin strength and diversification, these companies are in position to continue to gain further on the bullish trend in car sales. From the six auto-parts makers listed here, my two favorite are TRW Automotive and Dana Holding Corp. because of their bullish growth projections and attractive valuations.


Michael Vodicka does not personally hold positions in any securities mentioned in this article.

StreetAuthority owns shares of F in one or more of its "real money" portfolios. 


More from StreetAuthority


13Comments
Mar 12, 2013 10:59AM
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"Six stocks safer then RISKY F, GM." 

This Is the title of this article on the MSN homepage.  Yet your two favorites, TRW and DAN have a beta of 3.44 and 4.15. Through the roof.  GM has a beta of 1.28 and F 2.26.  If your going to talk about RISK, you better look at your selections, they reek of it.  Risk(Beta) can also mean great reward, but you have to be able to afford  the volatility.
 
See the contradiction?

Investors need to educate themselves about companies, fundamentals and stock purchases. Articles like this encourage green investors, (who tend follow experts advice),  to take too much risk, statistically leading them to do poorly in stock picking.

Mr Vodicka if your going to be a "expert" in investing, at least steer the little guy in the right direction.

Cheers.

PS remainder of your picks have acceptable Beta's.
Mar 12, 2013 10:03AM
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Wow! GM's risky?  Are you telling me that the federal government was irresponsible enough to invest tens of billions of dollars into a risky asset?  And if GM's a risky investment, how much worse Chrysler must be.
Mar 12, 2013 10:57AM
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the 2 percent payroll tax increase was not an increase but reinstating the old rate. dont blame the fiscal cliff for that. 
Mar 12, 2013 11:27AM
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Someone wrote to complain about the SS tax rising (or returning to normal).  This is another example of the 47%, which is a way to say people want gifts from the uncle and when there is a potential for the gift to be taken back people scream and vote their wallet (or plunder).  This is so obvious and if people deny the reality of this they are a liar.  This is so obvious, and yet Romney was tared and feather for stating the obvious.  Ok, maybe he did not say it "correctly" and the left spun it in a specific direction but the fact is people like stuff from the government and like the government stealling money from one group to give to them. 

Mar 12, 2013 11:29AM
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 Secondly regarding the SS tax increase, is it not interesting how the left shouts the end of the world with a reduction in the rate of growth in spending (ie the sequester) and yet when the same congressmen vote to increase the SS tax (back to normal) or increase tax rates thus removeing billions more from the private sector economy than the sequester did, they say there is to be no end of the world?  Lying Bstards
Mar 12, 2013 3:05PM
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After working in the automotive industry, it became obvious that the major OEMs (GM, Ford, etc.) often dictate profitability to their tier 1 suppliers, and ask for cost reductions of several percent for each year a component is in production.  OEMs ask for this reduction based on "productivity cost savings", as it's expected that the supplier will find efficiencies during the production life cycle.

Tier 1 suppliers do the same thing to their suppliers.  If the auto companies aren't making money, then they put additional pressure on their suppliers to reduce cost.  Therefore, the suppliers are pretty much at the mercy of the OEMs.  It's hard to make money as a parts manufacturer because you are either being pressured by the OEMs to cut costs, or pressured by the UAW to increase compensation and benefits.  Thats why GM spun off Delphi, and Ford spun off Visteon.

I would agree that Johnson Controls and Lear are good investment choices, because they are diversified beyond the auto industry.  The others, not so much.
Mar 12, 2013 1:26PM
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Hey Henry Ford....you didn't build that !
Mar 11, 2013 6:40PM
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WOW....nine whole cents.......what am I going to do with all that money................CALL ME WHEN IT GOES DOWN A BUCK..THEN YOU'VE GOT SOMETHING TO TALK ABOUT.
Mar 12, 2013 11:19AM
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dharmabun1,  you meniton beta / risk.  You sort of rail about beta.  I think when people talk about risk they are not talking about Beta risk (ie risk of volitility), they are talking about business risk.  The author as much as states this as he says "customers are fickled".  Besides Beta can be handled.  If markets are improving and or the economy is improving then a high Beta is your friend.  The time when Beta is a potential problem is when thing sour, then watch out.  But then again, you should do that to a degree with low Beta stocks.
Mar 12, 2013 12:09PM
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GM could be looking at another Million vehicle recalls. Another potential risk.
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