Due to improvement in the macroeconomic situation, the auto part industry has performed remarkably over the first nine months of this year. The 2013 third-quarter results were impressive in terms of revenue and earnings growth, driving auto parts stocks higher. Year to date, its total returns are standing at 41%. Industry profit margins are improving as companies benefit from operational efficiencies at manufacturing plants. The industry is expected to grow at a CAGR of 4.3% in the five-year period that closes in 2015.
Two leading players operating in this industry that also offer attractive returns for investors are Autoliv, Inc (ALV) and Genuine Parts Company (GPC). Both players are on a winning streak and are generating record sales in most of the regions. Their sales and market share in both world's biggest markets, like North America, and most attractive and emerging markets, like China, Brazil, and Japan are growing.
How Autoliv is a Safe Investment
Autoliv is a supplier of automotive safety systems. Its products include modules and components for passenger and driver-side airbags, side-impact airbag protection systems, seatbelts, steering wheels, and safety electronics among others. The company has been retaining its leading position in the auto parts industry, despite fierce competition and weak European demand. Autoliv holds more than one-third of the market share and holds a large share in safety products, including airbags, seatbelts and safety electronics.
Autoliv had a solid quarter, delivering strong growth and better-than-expected margins. Although operational issues and currencies negatively affected its margins, China and Active Safety products contributed significantly to its top-line growth. Compared to the third quarter of 2012, consolidated sales rose by close to 9% to $2,119 million. At the end of the recent quarter, all its regions grew faster-Europe by more than 2%, the Americas by close to 4%, and Asia by close to 8%. The company has significant global exposure and is actively seeking to capture emerging markets like China, Brazil and Japan.
Autoliv's growth strategy concentrates on increasing its Active Safety market share along with strengthening its passive safety leadership position. To do this, it is investing in technical development in active and passive safety. The company is actively seeking acquisition opportunities, primarily in Active Safety. Autoliv recently held an opening ceremony for its new propellant plant in China. This is the company's biggest investment till now, which will start working production in the start of 2014. This investment will support Autoliv's strong growth and give long-term competitive advantage as the company continues to build the most geographically dispersed global footprint.
Autoliv is expecting strong growth to continue into the next few quarters. The company is looking to generate solid top-line growth, driven largely by China and Active Safety. Additionally, the company is expecting more improvement in Japan, Brazil and Europe with important model launches and production ramp-ups. With the resilient growth in Active Safety, it is looking to achieve the long-term margin of 8% to 9% in the next two to three years. The company also predicts that its current market should grow by approximately 5% annually to more than $27 billion until 2015.
Autoliv's business strategy is working so far, as it is generating solid top- and bottom-line growth. This enables Autoliv to return significant cash to shareholders in the form of dividends and value of its share price. In the past five years, it has raised dividends by 138.1%. At the moment, it offers a quarterly dividend of $0.50/share. With strong profitability, it has been generating massive cash flows. At the end of the recent quarter, the company had $538 million in operating cash flows, and free cash flows are standing at $275 million. The company paid dividends of $143 million, which are completely protected by its free cash flows. Its payout ratio of 36.8% provides a lot of room to increase dividends.
How Genuine Parts is a Safe Investment
Genuine Parts Company engaged in the distribution of automotive, industrial replacement parts, replacement parts, electrical/electronic materials, and office products. The company has a long history dating back to 1928, the year it was founded in Atlanta, Georgia. During the past nine months, it conducted business throughout the United States, Canada, Mexico, Australasia and Puerto Rico from about 2,400 locations. Auto parts comprise approximately half of the business, with industrial parts approximately constituting about a third, and wholesale office supplies and electronic materials making up the rest.
At the end of recent quarter consolidated sales were up by 9% over the past year. Third quarter sales for the Automotive Group were up 22% for the second consecutive period. This increase includes core North American growth of approximately 5% and the positive impact of the Australasian acquisition. Sales for Industrial Group were down by 2.5%; Electrical/Electronic Group sales were down around 5%, and Office Products Group decreased by 3%. The third quarter proved to be challenging as non-automotive businesses demand patterns across these segments decelerated in the quarter.
In these challenging times, the company is focusing on sales initiatives and expense cutting across all of its businesses. In the long run, the company is committed to its core objectives of growing sales and earnings, showing operating margin improvement, generating solid cash flows, and maintaining a strong balance sheet. Its cash-flow-generating potential remains very sturdy over the years, and the company is in excellent financial condition. The company is carrying a low debt-to-equity ratio of 0.1, which further enhances cash reserves.
In the last twelve months, Genuine Parts has generated free cash flow of $865 million when dividend payments stand at only $320 million. However, the company has been making huge increases in its dividends over the years, but it has a lot of room to increase its dividends as its payout ratio stands at only 47%. This has allowed Genuine Parts to repurchase stock and make huge investments in growth opportunities. Last year, the company acquired 30% investment in GPC Asia Pacific, formerly known as the Exego Group, for around $166 million. This year, Genuine Parts acquired the remaining 70% interest in GPC Asia Pacific for roughly $590 million.
GPC Asia Pacific is a leading aftermarket distributor of automotive replacement parts and accessories in Australasia. GPC Asia Pacific has an ability to generate annual revenue of around $1 billion and a company-owned store footprint of over 430 locations across New Zealand and Australia. This acquisition will help Genuine Parts to participate in the major ongoing growth opportunities in the Australasian aftermarket.
Auto sales are boosting by huge pent-up demand. As auto sales continue to grow, the auto parts industry is expecting robust years ahead. However, Europe is still a concern for the industry. Auto parts industry is looking for growth in the U.S. and China along with other emerging markets to offset the weakness in Europe. Autoliv and Genuine Parts both are showing strong signs for growth in the coming time. Both companies are actively seeking growth opportunities combined with returning significant cash to investors.