While home ownership has long been a staple of the “American Dream,” the financial crisis fundamentally changed that. Since the real estate bubble burst, there has been another American Dream brewing: owning a car.
Car manufacturing is a $97 billion industry in the U.S. alone. What’s more is that this industry is heavily concentrated, with less than 200 auto manufacturers serving the entire industry. The U.S. home-building industry generates only $75 billion in revenue, with nearly 160,000 home-building companies.
The nice thing about the car industry is there are a vast number of options and possibilities. As a result, one of the best investment choices is original- equipment auto suppliers.
If the auto industry continues its upward trend, these companies should perform nicely. The latest data shows that auto sales remained strong in July. For the first six months of 2013, full-size pickup sales were up 22.5% and car sales up 5% year-over-year.
Seating
Johnson Controls, Inc. (NYSE:JCI) is over a century old, and manufactures auto-interior systems, batteries and building-control systems. The seat segment has grown rapidly thanks to outsourcing, as the company has been gaining manufacturing contracts for making seats that automakers formerly made in-house. The interior segment accounts for about one-half of Johnson’s revenue.
Sales for this segment are expected to see rising demand as emerging markets increase that demand. Johnson Controls, Inc. (NYSE:JCI) has been growing nicely, with EPS going from $1.99 in fiscal 2012 to $2.53 in 2012. Analysts expect these numbers to jump to $2.66 in 2013 and then $3.15 in 2014.
Johnson Controls, Inc. (NYSE:JCI) is also expected to see solid growth in its battery segment thanks to the influx of hybrid vehicles. Johnson’s power-solutions unit is the largest auto-battery operation in North America. Its batteries accounted for about 14% of 2012 sales. Johnson also snatched up Delphi Automotive PLC (NYSE:DLPH)’s battery business in 2006, which gave the company a strong presence in Asia.
Ford, GM and Daimler are the company’s three largest customers, but it’s looking to tap new customers by growing its sales in non-U.S. markets.
Infotainment
Harman International Industries Inc./DE/ (NYSE:HAR) is still one of the top producers of audio products and electronic systems for autos. The stock has been on a tear over the past week, up nearly 20% on a better-than-expected fiscal 2014 outlook. Harman expects to generate some $3.85 in EPS in 2014, compared to previous analysts’ estimates of $3.72.
The company’s CEO noted that Harman International Industries Inc./DE/ (NYSE:HAR)’s…”record high $20 billion backlog of awarded business is a clear validation of automakers’ confidence in Harman’s technology strategy to meet the evolving needs for solutions that are connected, safe, and intelligent.”
Meanwhile, the company also has a solid geographical profile, with 38% of 2012 sales coming from Germany, 22% the U.S., 21% other Europe and 19% from various other countries. Impressive diversification across major regions.
I also like Harman International Industries Inc./DE/ (NYSE:HAR)’s exposure to the entertainment industry. This industry should be a benefactor thanks to the rise in new, including touchscreen, infotainment systems.
Electric
Delphi Automotive PLC (NYSE:DLPH)’s key business is electrical for autos, which includes designing vehicle electrical architecture. This accounts for just over 40% of sales. Meanwhile, Delphi’s other segments includes powertrain systems (30%), electronics safety (17%), and thermal systems (10%). Its largest customers include General Motors (18% of revenue), Volkswagen AG (ADR) (OTCMKTS:VLKAY) (11%), Daimler (7%), and Ford (6%), where the majority of revenue (40% for 2012) comes from Europe, the Middle East and Africa.
Thanks to Delphi Automotive PLC (NYSE:DLPH)’s powertrain segment, the company should see increased demand due to increased regulations for fuel economy and emission standards. Of the 15 analysts with ratings, 11 have buy or strong buy ratings. The average price target is $62, suggesting over 10% upside.
Bottom line
How are these three auto-parts companies trading? Delphi Automotive PLC (NYSE:DLPH) appears to be the cheapest on a P/E basis:
However, all three should perform well, assuming the auto industry continues its robust growth. All three stocks have relatively low PEG ratios, with Johnson Controls, Inc. (NYSE:JCI) at 1.2, Harman International Industries Inc./DE/ (NYSE:HAR) 1, and Delphi Automotive PLC (NYSE:DLPH) at 0.8. If I had to choose one auto-parts company, it would have to be Delphi. Not only does it have the lowest P/E and lowest PEG, but it also has an impressively diverse-product portfolio and exposure to Europe, which should be one of the great growth stories going forward given pent-up demand.
Marshall Hargrave has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
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