Thriving in Detroit
Beyond the bankruptcies of Chrysler and GM, as well as those of some high-profile suppliers and dozens of private companies that have liquidated, are a group of parts suppliers with relatively low debt that have been slashing costs, striking better labor agreements, and positioning themselves to be favored suppliers. Their dramatically lower breakeven points should lead to big profits when consumers return to showrooms. Investors are counting on it: Since May 27, the S&P Auto Parts & Equipment Makers index has risen 32%, while the Standard & Poor's 500-stock index is up 11.7%.
Some of the stocks have seen huge gains (table). But analysts say there are still opportunities. As the remaining automakers remove excess manufacturing capacity and sell more global vehicles that don't require a lot of reengineering for each market, industry fundamentals are changing to benefit the strong suppliers. Ford Motor (F), for example, which is making a big move to global vehicles, recently cut suppliers whose financials it deemed too risky. And KeyBanc Capital Markets analyst Brett Hoselton says parts makers clearing such hoops are beginning to see better prices and margins. Also helpful: The U.S., Brazil, and the European Union are mandating tougher safety and emissions standards. Costs to meet safety requirements could be $1,200 a vehicle, while fuel economy rules will result in thousands more in cost per vehicle. Much of that added cost would go to suppliers.
Tom Kolefas, portfolio manager of the TIAA-CREF Mid-Cap Value Fund, is investing in companies with low debt that are well positioned in safety and environmental technology. One is Autoliv (ALIV), a leader in airbag and stability-control systems. It trades around 31, off from its 40.21 high last year, and its debt is 1.5 times cash and earnings before interest, taxes, depreciation, and amortization (EBITDA)—comparatively low for the sector. He also likes BorgWarner (BWA), which specializes in engine and transmission technology. At 29.82, it is well off its 43 high of a year ago. Its debt level is also 1.5 times its cash and EBITDA, and Kolefas says it has good revenue prospects because of rising demand for turbo chargers and other technology tied to high fuel efficiency.
Of course, if you invested in the highest fliers, the question now is: Time to sell? E. Keith Wirtz, chief investment officer at Fifth Third Asset Management in Grand Rapids, Mich., thinks that's a good idea after such runups, since he expects slow growth of auto sales. He makes an exception for TRW Automotive Holdings (TRW), though its stock has risen from 1.52 on Mar. 9 to 16.56. He likes its diversity of revenues across product lines and customers, and its growing business in China and other emerging markets.