Opportunities Abound In Auto Parts

Includes: CVGI, PBY, SRI
by: Emerging Growth

With a booming automotive market in the United States, automakers and dealers are the obvious beneficiaries, but there are other players further down the food chain, which offer excellent opportunities to investors to benefit from the positive market. One such company is Stoneridge, Inc. (NYSE: SRI), which supplies engineered electrical and electronic components for the commercial vehicle and agricultural vehicle markets. The company has limited focus on supplying parts to car makers. By keeping itself out of the glamorous car business, the company benefits from less competition and better margins, which are always higher on the commercial vehicle side than passenger vehicle business. The stock at a multiple of 1.47 to its book value of $5.36 but more importantly, this company is available at a forward price earnings ratio of just 8.7. Realizing the value, institutional investors have started accumulating the stock, which has caused a rally of 20 percent in the last month.

Commercial Vehicle Group Inc. (NASDAQ: CVGI) is another player in this business, which enjoys superior margins. The stock trades at a dismal price earnings ratio of 3.5 as earnings outlook is not very bright. However, if the current momentum in the U.S. economy continues, it would just be a matter of time before we see replacement demand coming in the truck market in much the same way as it has been unfolding in the car market. The company did much of the legwork last year to acquire new businesses in growth markets and in consolidating the existing ones. Since the benefits of these actions are not yet reflected in results, investors are not paying much attention to these positives. The stock is currently available at $7.98 having moved in the range of $6.69 - $12.95 in the last year.

Another way to play the fundamental strength in the industry is through buying stocks of auto parts stores networks such as The Pep Boys - Manny, Moe & Jack (NYSE: PBY). Despite vehicle sales growing on a healthy basis in recent months, let's not forget the market remained depressed for a long duration causing owners to keep their vehicles longer. Hard data from industry publications also suggest that average age of vehicles on roads is at a record high. This obviously causes more business for auto parts stores as older vehicles require higher maintenance. It is not just a one-time opportunity for the company but one which is likely to cause regular demand for a considerable future. This is reflected very well in the company's financial performance lately. Owing to excellent performance and better prospects, the stock has jumped 18 percent over the quarter. Despite the gains, the company remains undervalued as it trades just a notch above its book value of $10.2. Book value is a great indicator for gauging the attractiveness for this company, which operated 744 stores towards the end of October last year.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.