The Auto Industry has been hit very hard over the last few years. Perhaps investors have turned away from the sector a little, like they did with financials. As a consequence, I think there is some value to be found in the auto industry. These four are the most undervalued stocks I came across during my research for attractive investments. To quantify how attractive they are, I performed a DCF calculation on these companies and summarize their main competitive advantages and other key information.
Three of them add significant global exposure, but Advance Auto Parts (AAP), not so much. During my research, I especially liked the part suppliers mentioned in this article, and wrote focused articles on them before; however, there were several automakers I think deserve attention too.
With all the pent up demand that has built up over the last few years, automakers and suppliers to the industry possibly have better times ahead of them.
In addition, on the analyst day last month, CEO Darren R. Jackson - Advanced Auto Parts - talked about a few interesting numbers:
Scrappage rate is at a level that means that cars are staying on the road longer in general. That is a good trend for auto parts dealers.
77% of those vehicles that are on the road are 5 years or older, and that is exactly the sweet spot for auto parts suppliers.
Not surprisingly Americans have deferred maintenance to their cars, like they deferred buying a new car as well. In the end, a car is going to run out of its useful life and consumers will be forced to replace it, which could become a catalyst for increased sales.
1. Advance Auto Parts, Inc.
AAP is an auto parts and accessories retailer. The company operates primarily in the Northeastern, Southeastern and Midwestern States. It also has a few stores in Puerto Rico and the Virgin Islands. I like that it is strong in certain geographical regions, which is a small competitive advantage to keep distribution efficient. The company has been restructuring and increasing margins while growing revenue. Its cost structure is a competitive advantage to many smaller stores, but lags its few larger peers.
This could be a solid long-term investment, not just a trade on the auto industry making a full rebound. I wrote a focused article on Seeking Alpha about AAP called: 6 Reasons To Buy Advance Auto Parts. The shares are still available trading at $85.8, only up $0.80 from my initial recommendation. A small bonus that comes with AAP is that last year rumors started circulating that Advance might be in the early stages of discussions with private equity about a potential buyout. Rumors have died down, but it's still something that should be kept in mind, when considering this stock.
After performing a discounted cash flow analysis projecting earnings 5 years forward, using reasonable figures, while discounting against the S&P 500, my conclusion is that the shares are worth $95. That means they are about 11% undervalued.
2. General Motors Co. (GM)
General Motors Company emerged from the bankruptcy of General Motors Corporation in July 2009. It has been restructured and the company is now able to turn a profit at much lower levels of demand as it could previously. GM sells over 70% of vehicles outside the USA. Keep in mind that US sentiment about GM is important but not critical. However, this also means the European economy, which is still very much on life support, is not driving sales like it could. Fellow Seeking Alpha contributor Black Coral Research wrote a recent and interesting dedicated article about GM.
After performing a discounted cash flow analysis projecting earnings 5 years forward, while discounting against the S&P 500, my conclusion is that the shares are worth $41 today. As the company has only recently emerged from bankruptcy, to determine a reasonable growth rate, I used growth figures applying to the wider industry as provided by reportlinker. That means the shares are about 24% undervalued.
|GM||11.4||1.71||N/A||$ 2.92||$ 33.23|
3. Fiat Group S.p.A ADR (OTCPK:FIATY)
Fiat is an auto manufacturer with extensive experience and knowledge about small engine technology and low emission cars. That positions it well in a climate of increasing regulation regarding emission.
The company is also well positioned in developing markets like the BRICs, with strong market shares to show for. It has an incredible amount of $37 Billion in debt, but also holds $24 Billion in cash. The company appears to be undervalued because of the European situation. At $6.90 it is an attractive investment. Fellow Seeking Alpha Contributor Mark Cianchetti wrote a focus article about the reasons why Fiat is undervalued.
After performing a discounted cash flow analysis projecting earnings 5 years forward using reasonable figures, while discounting against the S&P 500, my conclusion is that the shares are worth $7.8. That means they are about 12% undervalued at the present time.
|FIATY||28||1.04||N/A||$ 0.25||$ 6.90|
4. Cooper Tire & Rubber Company (CTB)
Cooper Tire & Rubber Company is a global company with affiliates, subsidiaries and joint ventures that specialize mainly in the design, manufacture, marketing and sales of passenger car and light truck tires.
The stock went up a little since I recommended it at $ 24 but is still attractive to long-term investors. Things I liked about the company include: growing earnings over the past few years, management goals, small steady dividend, decent book value and an attractive price with the possibility of profiting if the cyclical auto industry gets going. Read my focus article about Cooper Tire & Rubber Company here.
After performing a discounted cash flow analysis projecting earnings 5 years forward, using a weighting of estimated industry figures and historical figures for the company, while discounting against the S&P 500, my conclusion is that the shares are worth $36. That means they are about 38% undervalued at the present time.
Four companies that are undervalued, with CTB and AAP making the stronger long-term holdings as they are less susceptible to the cyclical demand, judging by their historical performance.
The big automakers are especially well suited to a bet on the cyclical auto industry turning around globally. Both Fiat and GM add the most international exposure to a portfolio, although Cooper has international sales as well.
Because of my focus articles on CTB and AAP my research on these companies has been more in depth and that's why I have a preference for these companies, but I'm planning to write focus articles on the other companies in the near future. In the meantime, I hope you enjoy the focus articles by my fellow Seeking Alpha contributors.