GM (NYSE: GM)
celebrates an impressive re-entry into the public markets,
investors are chewing over a clear theme. Both GM and
are far healthier companies, with much leaner cost structures and
the ability to generate sharply improved profit margins as industry
volumes rebound. In their shadow, key auto parts suppliers are also
now in fighting shape after being bruised and battered in the
economic freefall of 2008. The new adage for the industry: "what
doesn't kill you makes you stronger."
How bad did it get for these auto parts suppliers? Domestic auto
makers produced 15-16 million cars and trucks every year from 2001
to 2007. That figure fell to 12.5 million in 2008 and just 8.5
million in 2009. Years of steady profits were offset by massive
losses in 2008 and 2009, and a number of these firms flirted with
bankruptcy. For a short while, many of their stocks traded below
$1. In a testament to just how much they have changed, all of the
key players are likely to be nicely profitable again this year,
even though the industry will produce just 11.5 million units.
Looking ahead into 2011 and 2012, industry unit volumes are
expected to rebound to 12.5 million and 13.5 million, respectively,
according to Citigroup. And that could prove to be conservative.
That's because domestic auto makers are starting to take back
, which means a rising swell of business for the firms that make
seats, transmissions, suspensions and the like.
Shares of auto suppliers have rallied sharply in the past year, but
remain very reasonably priced in relation toearnings …
With GM's successful
in the news, customers may start to flock back to the auto maker in
droves, now that they see it as healthier. That hasn't been the
case recently. Ford announced that October sales rose +19% from a
year ago, while many other auto makers also posted double-digit
gains. GM saw a more modest +3.5% sales boost in October.
As a self-professed car nut, I had been a big fan of Ford Motor,
noting that its new models were compelling and shouldyield market
share gains. [
Read my analysis here
These days, I'm starting to pay closer attention to GM as it starts
to build out its impressive new product portfolio. The Buick
division is a big hit in China, Cadillac is unveiling a strong set
of new cars that can go head-to-head with anything made in Germany,
and the Chevy and GMC truck divisions should eventually see a major
profit rebound when the U.S. construction industry picks back up.
But rather than buying shares of GM, you might want to focus on the
auto parts suppliers with the greatest exposure to this erstwhile
titan. Shares of many of these names remain cheap, and a resurgent
car market could lead these stocks to nice gains.
Here are a few key names...
If you're talking about GM's pickup trucks, then you're talking
, which makes seats and electrical systems for GM's GMT 900 truck
platform. Lear has been on a tear lately, delivering quarterly
profits that were more than twice as high as analysts had expected
in each of the past two quarters. A -$2.00 a share loss in 2009 is
likely to morph into an $8.00 a share profit this year. A little
back-of-the-envelope math that assumes industry volume hits 14
million by 2013 could
earnings per share (EPS)
north of $12 for Lear. Shares trade for just seven times that view.
American Axle (
has even greater exposure to GM, with more than two- thirds of its
business from the company. (It was once an in-house division at
GM.) The company makes axles and drivetrains, primarily for large
vehicles. The company has also handily exceeded forecasts in each
of the past two quarters and also notes that
is rising fast. That led JP Morgan to recently upgrade shares to
, with a $14 price target -- +25% above current levels. Yet the
analysts note that shares could surge closer to the $20 mark within
a few years as GM's sales volume rebounds. They add that American
Axle is on track to boost EBITDA +30% next year to around $370
million, and it could hit $500 million within a few years.
Action to Take -->
Johnson Controls (
also have a high degree of exposure to GM. As noted earlier, all of
the shares in this sector have rallied throughout 2010, and would
be vulnerable to a pullback if auto and truck sales don't continue
to rebound in 2011 as many expect.
Stocks in this group appear quite inexpensive, especially in terms
of potential EBITDA generation. How auto industry sales fare in the
next few years will determine how much more upside these stocks
-- David Sterman
David Sterman started his career in equity research at Smith
Barney, culminating in a position as Senior Analyst covering
European banks. David has also served as Director of Research at
Individual Investor and a Managing Editor at TheStreet.com. Read
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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