After facing a challenging 2022, where sales of light vehicles fell to their lowest level since 2012, the automotive industry expects solid growth in new vehicle sales despite economic challenges. Although the auto parts industry is not entirely dependent on new vehicle sales, an increase in automobile sales will help boost the demand for auto parts.
To that end, it could be wise to invest in fundamentally strong auto parts stocks such as DENSO Corporation (DNZOY), Ituran Location and Control Ltd. (ITRN), and Commercial Vehicle Group, Inc. (CVGI), which look poised for solid growth.
Before diving deeper into the fundamentals of these stocks, let’s discuss why investing in auto parts names could be prudent.
An automobile comprises several components and parts and is vital for the proper functioning of a vehicle. According to Cox Automotive, new-vehicle sales for 2023 are forecasted to increase 3% year-over-year to 14.20 million units. Although auto parts companies only partially rely on new-vehicle sales for their growth, the increase in new-vehicle sales is expected to benefit the industry.
The automobile industry is cyclical as new vehicle sales often get affected due to macroeconomic factors like high inflation, rising interest rates, etc. On the other hand, the auto parts industry is relatively unaffected by macroeconomic factors because it enjoys stable demand as people maintain and repair their vehicles irrespective of economic cycles.
Due to the increasing use of advanced technology and components inside newer vehicles, the auto parts industry is expected to grow substantially in the long run. The global automotive OEM market is expected to grow at a CAGR of 4.2% to hit $46 billion by 2030. In addition, the global automotive aftermarket industry’s revenue is expected to grow at a CAGR of 4% to reach $589.01 billion by 2030.
Considering these factors, it could be wise to buy the featured stocks. Let’s take a closer look at the fundamentals of these stocks.
DENSO Corporation (DNZOY)
Headquartered in Kariya, Japan, DNZOY is engaged in the manufacture and sale of automotive parts. It produces air-conditioning systems, powertrain systems, safety and cockpit systems, and automotive service parts. It also offers industrial and agricultural solutions and household air conditioning equipment.
DNZOY’s EBIT grew at a CAGR of 87.1% over the past three years. Its net income grew at a CAGR of 66.6% over the past three years. In addition, its EPS grew at a CAGR of 67.9% in the same time frame.
In terms of the trailing-12-month net income margin, DNZOY's 4.92% is 14.9% higher than the 4.28% industry average. Likewise, its 12.35% trailing-12-month EBITDA margin is 13.4% higher than the industry average of 10.90%. Furthermore, the stock’s 5.63% trailing-12-month Capex/Sales is 73.8% higher than the industry average of 3.24%.
DNZOY’s revenues for the fiscal year ended March 31, 2023, increased 16.1% year-over-year to ¥6.40 trillion ($45.80 billion). Its operating profit rose 24.9% over the prior-year quarter to ¥426.10 billion ($3.05 billion). Its net profit attributable to owners of the parent company increased 19.2% year-over-year to ¥314.63 billion ($2.25 billion).
Street expects DNZOY's revenue for the quarter ending June 30, 2023, to increase 13.1% year-over-year to $12.01 billion. The stock has gained 39.3% year-to-date to close the last trading session at $34.21.
DNZOY's POWR Ratings reflect strong prospects. The stock has an overall rating of A, translating to a Strong Buy in our proprietary rating system. The POWR ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #5 out of 59 stocks in the A-rated Auto Parts industry. It has an A grade for Growth and a B for Momentum, Stability, and Quality. Click here to see DNZOY's rating for Value and Sentiment.
Ituran Location and Control Ltd. (ITRN)
Headquartered in Azor, Israel, ITRN offers location-based telematics services and machine-to-machine telematics products. It has two segments: Telematics Services and Telematics Products.
On June 5, 2023, ITRN announced a partnership between its Brazilian subsidiary, Ituran Brazil, and Santander. The partnership aims to simplify credit approval for customers seeking vehicle financing, making purchasing new or used cars easier.
ITRN’s CEO, Eyal Sheratzky, emphasized that through this partnership, Bank Santander’s customers will be able to count on nationwide vehicle recovery services. He said, “In addition, customers will have real-time visualization of their vehicle’s location through the Ituran application. This includes the ability to create movement alerts as well as access to the vehicle’s location history.”
In terms of the trailing-12-month net income margin, ITRN's 13.22% is 672.1% higher than the 1.71% industry average. Likewise, its 20.07% trailing-12-month EBIT margin is 380% higher than the industry average of 4.18%. Furthermore, the stock’s 0.99x trailing-12-month asset turnover ratio is 62.6% higher than the industry average of 0.61x.
ITRN’s EBITDA grew at a CAGR of 6.1% over the past three years. Its net income grew at a CAGR of 97% over the past three years. In addition, its EPS grew at a CAGR of 98.7% in the same time frame.
ITRN's revenues for the first quarter ended March 31, 2023, increased 10.3% year-over-year to $79.47 million. Its gross profit rose 10.3% over the prior-year quarter to $36.69 million. Its net cash provided by operating activities increased 150.3% year-over-year to $17.40 million.
The company’s operating income increased 10.8% year-over-year to $15.91 million. Its net income attributable to the company rose 30.1% year-over-year to $11.36 million. Also, its EPS came in at $0.56, representing an increase of 30.2% year-over-year.
Analysts expect ITRN's EPS for the quarter ending June 30, 2023, to increase 22.8% year-over-year to $0.53. The stock has gained 18.3% year-to-date to close the last trading session at $24.99.
ITRN’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
It has an A grade for Stability and Quality and a B for Growth, Value, and Sentiment. Within the same industry, it is ranked #3 out of 59 stocks. To see ITRN’s rating for Momentum, click here.
Commercial Vehicle Group, Inc. (CVGI)
CVGI designs, manufactures, and sells components and assemblies for commercial vehicles. It operates in four segments: Vehicle Solutions, Electrical Systems, Aftermarket & Accessories, and Industrial Automation. CVGI offers electrical wire harness assemblies, electro-mechanical assemblies, seating systems, mirrors, and other vehicle-related products.
On April 6, 2023, CVGI announced the opening of two new plants in Tangier, Morocco, and Aldama, Mexico. Each plant will begin production in Q3 2023. This expansion supports CVG's electrification systems business strategy to meet increasing customer demands.
CVGI’s President and CEO Harold Bevis said, “These new strategic locations will allow us to align our services with our customers’ demands in the rapidly growing electrification landscape.”
On April 12, 2023, CVGI announced the launch of AftermarkeTruckParts.com, an e-commerce platform offering renowned brands like Bostrom Seats, National Seats, Sprague windshield wiper systems, and Moto Mirror products. The launch of its e-commerce platform will help the company reach newer customers.
In terms of the trailing-12-month levered FCF margin, CVGI's 6% is 15.2% higher than the 5.21% industry average. Likewise, the stock’s 1.88x trailing-12-month asset turnover ratio is 135.6% higher than the industry average of 0.80x.
CVGI’s revenue grew at a CAGR of 5.8% over the past three years. Its levered FCF margin grew at a CAGR of 12.8% over the past three years. In addition, its total assets grew at a CAGR of 4.9% over the past three years.
CVGI’s revenues for the first quarter ended March 31, 2023, increased 7.5% year-over-year to $262.70 million. Its adjusted net income rose 73.6% over the prior-year quarter to $9.20 million. Also, its adjusted EPS came in at $0.28, representing an increase of 75% year-over-year. In addition, its adjusted EBITDA increased 46.7% year-over-year to $19.80 million.
For the quarter ending June 30, 2023, CVGI’s EPS and revenue are expected to increase 89.8% and 4.1% year-over-year to $0.25 and $261.07 million, respectively. Over the past nine months, the stock has gained 73.6% to close the last trading session at $10.07.
CVGI’s positive outlook is reflected in its POWR Ratings. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system.
It has an A grade for Growth and Sentiment and a B for Value. It is ranked #9 in the Auto Parts industry. Click here to see CVGI’s ratings for Momentum, Stability, and Quality.
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DNZOY shares were trading at $34.37 per share on Wednesday afternoon, up $0.16 (+0.47%). Year-to-date, DNZOY has gained 41.15%, versus a 14.82% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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