American auto parts manufacturers operate in a very dynamic environment. When the financial meltdown of 2008 hit the auto manufacturers, auto parts manufacturers were not spared. Companies in the auto parts industry saw great drops in their revenues and their future outlook started to look bleak to the investors. American consumers, fearing the onslaught of the financial meltdown, reduced their spending on new cars.
American auto makers are in the news again. I have selected three auto parts makers that have been traded in large amounts in the past month to find out which one of them provides the greatest investment opportunity. The companies are American Axle & Manufact. Holdings, Inc. (NYSE:AXL), Visteon Corp (NYSE:VC) and Lear Corporation (NYSE:LEA).
Competitive edge of American Axle & Manufacturing Holdings
My first pick is a company that has global operations. American Axle & Manufact. Holdings, Inc. (NYSE:AXL) is involved in the design, engineering, validation and manufacturing of drivetrain and driveline systems and related components. The company also manufactures chassis modules for automotive industry worldwide.
The company’s first quarter report highlighted that American Axle & Manufact. Holdings, Inc. (NYSE:AXL) has a backlog of $1.25 billion. With time, this amount will be realized in the revenues of the company. The company was also relying heavily on sales to General Motors Company (NYSE:GM) in the past, but by the year 2015, it expects to sell 50% of its products to other auto manufacturers.
Source: Morningstar
The company has been successful in pulling itself out of the mess the 2008 financial meltdown created by reporting positive EPS figures for the past three years. As the company’s reliance on General Motors Company (NYSE:GM) reduces, we can expect it to increase its earnings by huge percentages. Due to these reasons, I am very optimistic about the company’s future. I would, therefore, give a buy recommendation for the company.
Future outlook of Visteon
Visteon Corp (NYSE:VC) has three business segments under its control: Climate, Electronics and Interiors. Through these business segments, the company engages in the design, development, manufacturing and support of climate, electronic and interior systems to serve several original equipment manufacturers, or OEMs, worldwide.
The company’s first quarter results were ahead of the analyst expectations. The company showed that it made 46% of its sales to the Asia Pacific region, 30% to the European Union region, 19% to the North America region and 5% to the South America region. This strategy is helping the company as auto makers in the United States are not performing up to the mark. The company is able to indirectly exploit the growing demand for automobiles from the emerging economies. The three year backlog of the company has mounted to a hefty $700 Million in the first quarter, and it will continue to benefit the company until the year 2015.
Source: Morningstar
The company has been able to reverse the effect of the 2008 financial meltdown, in which it reported an annual diluted loss per share of up to $5.26. Starting from the year 2010 to the trailing-twelve-month period, the company has steadily increased its EPS figures with the highest figure being reported last year.
I believe that the business of the company is poised for growth, and there exists a great upside potential for the stocks of the company. I would, therefore, give the buy recommendation to investors.
Operating model of Lear
My third pick is Lear Corporation (NYSE:LEA). The company conducts operations through its two major segments: Seating and Electrical Power Management Systems, or EPMS. Through these segments, the company designs, manufactures, and supplies electrical distribution systems, automotive seat systems and related components to several different OEMs.
This company has global operations which provide it exposure to a huge target market. Lear Corporation (NYSE:LEA) prides itself on providing low-cost products to its customers. The company’s first quarter results showed Lear’s sales increased by 8%. The EPMS segment of the company reported a 25% jump in its sales.
The company was able to divest its non-core International Automotive Components equity interest. That coupled with Lear Corporation (NYSE:LEA)’s new bond issue increased the liquidity of the company by more than $1 billion. This allowed the company to initiate a share repurchase program.
Source: Morningstar
The company was quick to recover from the financial meltdown of 2008. In 2009, it reported a positive EPS but that figure was not crossed until the year 2012. The company’s profitability has increased greatly in recent times.
Further good news in the first quarter results showed that Lear Corporation (NYSE:LEA) has a three-year sales backlog of $1.8 billion, which will continue driving the company’s sales through 2015. I believe that the best is yet to come for this company and I would give investors a buy recommendation for it.
Final takeaway
The worldwide demand for automobiles is bound to increase as more and more emerging economies try to up the standards of living in their countries. With demand for automobiles rising only at meager rates in the United States, auto parts manufacturers have done the right thing to exploit demand from the emerging economies. I analyzed three successful auto parts manufacturing companies. All three of them have positive outlooks and for that I would recommend investors to take a long position on them.
Awais Iqbal has no position in any stocks mentioned. The Motley Fool recommends General Motors.
The article Are There Solid Investment Opportunities in the Auto Parts Industry? originally appeared on Fool.com.
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