While the better-known stock market indices like the S&P 500, Dow Jones Industrial Average, Nasdaq 100, and others are most often used to gauge the strength of the market’s recovery, some would argue an even better measure can be found in transportation — such as in the Dow Jones Transportation Index (DJT).
After all, you can’t have a recovery without shipping products and materials.
Comprised of 20 U.S. transportation companies — which include five airline, four trucking, four railroad, three delivery, two maritime transportation, one business support, and one general transportation companies — the index has its finger on the pulse of American shipping.
How has the DJT been faring? Since the market bottomed in March of 2009, the transportation index has posted stellar gains of 237%, beating the S&P 500’s 163% gain by almost half.
Five years and counting, the recovery is still going strong without any signs of letting up. Over the past 12 months, where the S&P 500 has gained a robust 17%, the DJT has outperformed again with gains of 32% — nearly double the broader market’s.
If you want to capitalize on the still-ongoing U.S. recovery, you might want to take a closer look at some of the transports. In view of the many automobile and light truck recalls by the major manufacturers lately, an awful lot of new parts are going to be needed. So let’s narrow our focus onto auto parts companies.
Auto Parts Segment Expectations
Auto manufacturing continues to increase globally, with sales steadily on the rise. According to Scotiabank’s latest Global Auto Report released just a month ago on June 27th, “Global car sales re-accelerated in May, climbing 4.5% above a year earlier. China and the U.S. led the way with double-digit year-over-year gains, but volumes also picked up across Asia and Western Europe.”
While Europe’s auto sector has been on the decline for several years, 2014 may have marked a turning point.
“Car sales and production in Western Europe are in the early stages of a cyclical recovery, with purchases set to increase this year from a sixteen-year low in 2013,” the Scotiabank report assesses. “Through May, car sales in Western Europe have advanced 6%, with volumes strengthening in 14 of the 18 countries in the region.”
More auto sales mean increased production. In Western Europe, “during the first five months of 2014, vehicle assemblies climbed 6% above a year earlier,” Scotiabank informs. “This development coincides with strengthening production across North America [as] automakers boosted assemblies in May 3% above their original schedule, and are set to produce record volumes in June/July,” along with “double-digit gains in China.”
The report then posts the following projections for total auto sales in 2014 by region:
- North America: 72.13 million units — new record annual high
- Western Europe: 12.25 million — highest since 2011
- Eastern Europe: 4.12 million — second-highest year behind 2012’s 4.14 million
- Asia: 32.38 million — new record annual high
- South America: 4.51 million — third-highest year behind 2013 and 2012.
And here’s the clincher for our exposé today… “Rising vehicle output will also boost demand for an extensive quantity of inputs,” Scotiabank concludes, “including steel, plastics, metals and electronics… and parts.”
Add to this a number of record auto and light truck recalls, and you have a bonanza for the auto parts industry.
Perhaps it may be time to replace a stock or two in our portfolios with some new parts, too. Here are just three to consider, all of which have earnings due out this week…
Tenneco Inc. (NYSE: TEN)
Set to report its Q2 results on Monday, analysts expect Tenneco to post earnings of $1.26 per share, which would beat last year’s Q2 earnings of $1.10 per share by 14.5%. That would handily beat the S&P 500’s expected Q2 year-over-year quarterly growth rate of 12.5% by two percentage points.
Founded in 1987 and headquartered in Lake Forest, Illinois, this $4.14 billion mid-cap auto parts business designs, manufactures, and sells clean air and performance systems and parts for light vehicles, commercial trucks, and industrial machinery.
Its emission control products include catalytic converters, diesel oxidation catalysts, mufflers, and noise reduction systems, while its ride performance parts include shock absorbers, struts, vibration control components, and suspensions.
While the company sells parts under various name brands, it also supplies auto and truck manufacturers directly and is undoubtedly benefitting from the recall parade of millions of vehicles as of late.
Tenneco is still modestly priced at 12.74 times forward earnings, much cheaper than the average 17.42 PE ratio in the S&P 500 — despite strong returns on assets and equity of 8.24% and 47.31% over the trailing 12 months and an EBITDA of $722 million representing a respectable 8.85% of its $8.16 billion in revenues.
In today’s Q2 report, analysts expect revenues to have grown to $2.22 billion from $2.07 billion year-over-year for an increase of a comfortable 7.2%. The company has beaten estimates in all of the past four quarterly reports by as little as 0.9% to as much as 15.7%.
BorgWarner Inc. (NYSE: BWA)
Set to report its Q2 results on Thursday the 31st, analysts expect BorgWarner to post earnings of $0.87 per share, which would beat last year’s Q2 earnings of $0.75 per share by 16%, thereby surpassing the S&P 500’s 12.5% quarterly growth rate by 3.5 percentage points.
Founded in 1987 and headquartered in Auburn Hills, Michigan, this $15.05 billion large-cap auto parts company manufactures and sells parts and systems geared primarily toward powertrains. Other parts include turbochargers, timing devices, emissions systems, thermal systems, ignition parts, crankshaft and camshaft components, and parts for various clutch systems.
The company’s customers include manufacturers of light vehicles including passenger cars, sport utility vehicles, vans, and light trucks, as well as makers of commercial vehicles such as medium- and heavy-duty trucks, buses, and agricultural and construction machinery.
BorgWarner is moderately priced at 16.58 times forward earnings, fairly close to the broader market’s average 17.42 PE ratio. The stock is made more attractive by its returns on assets and equity of 8.84% and 19.41% over the trailing 12 months and its EBITDA of $1.29 billion, representing a powerful 16.8% of its $7.67 billion in revenues.
In Thursday’s Q2 report, analysts expect revenues to have grown to $2.20 billion from $1.89 billion year-over-year for an increase of a robust 16.4%. The company has beaten estimates in all of the past four quarterly reports by as little as 3.7% to as much as 11.3%.
American Axle & Manufacturing Holdings Inc. (NYSE: AXL)
Saving the best for last, AXL’s Q2 results due out Friday August 1st are expected to show earnings of $0.72 per share — absolutely clobbering last year’s Q2 earnings of $0.34 per share by 111.76% and smashing the S&P 500’s 12.5% quarterly growth rate nearly ninefold.
Founded in 1994 and headquartered in Detroit, Michigan, this $1.45 billion small-cap auto parts company designs and manufactures driveline and drivetrain systems and related components, along with chassis modules. Its products include axles, driveshafts, power transfer units, transfer cases, chassis and steering components, and transmission parts.
The company’s clientele include manufacturers of light trucks, sport utility vehicles, passenger autos, crossovers, and commercial vehicles.
AXL’s stock is extremely underpriced at 7.10 times forward earnings, less than half the broader market’s 17.42 — despite posting a decent return on assets of 5.27% over the past 12 months, along with an EBITDA of $442.9 million representing a solid 13.38% of its $3.31 billion in revenues.
In Friday’s Q2 report, analysts expect revenues to have grown to $995.45 million from $799.60 million year-over-year for an increase of an outstanding 24.49%. The company has beaten estimates in three of the past four quarterly reports, ranging from a miss by -16.40% in Q3 of 2013 to a beat by 47.90% in Q4.
The following graph compares the three reviewed auto parts companies to the Dow Jones Transportation Index (blue) and S&P 500 index (black) over the past two years.
Source: BigCharts.com
Joseph Cafariello
