The auto parts industry is popular amongst investors as it remains well insulated against the ups and downs of the economy. The auto parts industry is well-positioned for solid growth due to increasing demand for new vehicles, steady aftermarket sales, and the rising use of advanced technology and components.
Considering these factors, it could be wise to buy fundamentally strong stocks Hyster-Yale Materials Handling, Inc. (HY), Modine Manufacturing Company (MOD), Continental Aktiengesellschaft (CTTAY), and Garrett Motion Inc. (GTX), which look poised for growth.
Before diving deeper into their fundamentals, let’s discuss why the auto parts industry is well-positioned for growth.
Although the auto parts industry does not rely entirely on new vehicle sales for its growth, it is likely to benefit from the growth in new vehicle sales this year. According to the National Automobile Dealers Association (NADA), total new vehicle sales for 2023 are expected to be 15.2 million units. Globally, sales of new vehicles are expected to reach 86.8 million units, surpassing the previous estimate of 86.4 million units.
High vehicle prices and the likelihood of interest rates remaining higher for longer, the affordability of new vehicles is expected to remain challenging in the near term. This is expected to force potential new car buyers to keep their existing cars longer. This benefits auto parts suppliers as maintaining an older vehicle is more economical than buying a newer one.
Furthermore, the industry is set for robust growth in the long term because of the increasing demand for automotive customization, the introduction of advanced technologies like navigation systems and driver assistance systems, and the rise of e-commerce platforms offering automotive parts.
The global auto parts manufacturing market is projected to achieve a 6.3% CAGR and reach $939.21 billion by 2028.
Considering these conducive trends, let’s analyze the fundamental aspects of the four Auto Parts picks, beginning with the fourth choice.
Stock #4: Hyster-Yale Materials Handling, Inc. (HY)
HY designs, engineers, manufactures, sells, and services a line of lift trucks, attachments, and aftermarket parts worldwide. The company manufactures components, such as frames, masts, and transmissions; and assembles lift trucks. It markets its products primarily under the Hyster and Yale brand names to independent Hyster and Yale retail dealerships.
HY’s revenue grew at a CAGR of 8.8% over the past three years. Its EBITDA grew at a CAGR of 11.6% over the past three years. Moreover, its EBIT grew at a CAGR of 18.3% over the past three years.
In terms of the trailing-12-month Return on Common Equity, HY’s 14.36% is 5.7% higher than the 13.60% industry average. Likewise, its 6.90% trailing-12-month Return on Total Capital is 1.6% higher than the 6.79% industry average. Additionally, its 1.88x trailing-12-month asset turnover ratio is 131.8% higher than the 0.81x industry average.
For the second quarter ended June 30, 2023, HY’s revenue increased 21.8% year-over-year to $1.09 billion. Its operating profit came in at $58.80 million, compared to an operating loss of $15.70 million in the year-ago quarter. The company’s net income came in at $38.30 million, compared to a net loss of $19.40 million in the prior year quarter.
Additionally, its earnings per share came in at $2.21, compared to a loss per share of $1.15.
For the quarter ending September 30, 2023, HY’s revenue is expected to increase 11% year-over-year to $932.60 million. Its EPS for the quarter ending December 31, 2023, is expected to increase 256.8% year-over-year to $1.57. It surpassed the consensus EPS estimates in three of the trailing four quarters. The stock has gained 73.5% year-to-date to close the last trading session at $43.90.
HY’s positive outlook is reflected in its POWR Ratings. It has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Growth and Value and a B for Momentum. It is ranked #18 out of 59 stocks in the A-rated Auto Parts industry. To see HY’s Stability, Sentiment, and Quality ratings, click here.
Stock #3: Modine Manufacturing Company (MOD)
MOD provides engineered heat transfer systems and heat transfer components for use in on- and off-highway original equipment manufacturer (OEM) vehicular applications. It operates through the Climate Solutions and Performance Technologies segments.
On September 6, 2023, MOD signed a deal to sell three German-based automotive component businesses in Neuenkirchen, Pliezhausen, and Wackersdorf to Regent LP affiliates. These businesses generated combined revenue of $80-$90 million in Fiscal Year 2023. The sale would help the company focus its resources on high-margin technologies with strong growth drivers.
On August 15, 2023, MOD launched a new electric infrared product line - the MEL Series. This high-wattage, commercial-grade electric infrared heater offers energy efficiency, fast heat-up times, and versatility for various applications, including outdoor patios and commercial spaces. The MEL Series is UL-certified for both residential outdoor and commercial use, with input voltages ranging from 120V to 480V.
Jon Schlemmer, Vice President and General Manager of Heating Business at MOD, said, "The MEL Series provides our customers with a low-emissions heating product that can be used in a wide range of applications. We're excited to add this new product to our growing line of electric heating solutions. Our team is committed to offering products that support Modine's purpose of engineering a cleaner and healthier world."
MOD’s revenue grew at a CAGR of 9.9% over the past three years. Its levered FCF grew at a CAGR of 12.6% over the past three years. Moreover, its EBITDA grew at a CAGR of 29.5% over the past three years.
In terms of the trailing-12-month EBIT margin, MOD’s 8.09% is 9% higher than the 7.42% industry average. Likewise, its 34.04% trailing-12-month Return on Common Equity is 198.8% higher than the 11.39% industry average. Additionally, its 1.57x trailing-12-month asset turnover ratio is 56.4% higher than the 1x industry average.
MOD’s net sales for the fiscal second quarter that ended June 30, 2023, increased 15% year-over-year to $622.40 million. Its gross profit increased 53.4% year-over-year to $127.90 million. Its operating income increased 159.8% year-over-year to $66.50 million. The company’s net earnings attributable to MOD rose 213.3% year-over-year to $44.80 million.
Additionally, its adjusted earnings per share rose 165.6% year-over-year to $0.85. Also, its adjusted EBITDA increased 90.5% year-over-year to $80.40 million.
Analysts expect MOD’s EPS and revenue for the quarter ending September 30, 2023, to increase 37% and 6.5% year-over-year to $0.66 and $616.18 million. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 202.2% to close the last trading session at $44.03.
MOD’s POWR Ratings reflect solid prospects. It has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
It is ranked #15 in the same industry. It has a B grade for Growth, Sentiment, and Quality. Click here to see MOD’s Value, Momentum, and Stability ratings.
Stock #2: Continental Aktiengesellschaft (CTTAY)
Headquartered in Hanover, Germany, CTTAY is a technology company that offers intelligent solutions for vehicles, machines, traffic, and transportation worldwide. It operates through four sectors: Automotive, Tires, ContiTech, and Contract Manufacturing.
On September 25, 2023, CTTAY announced the delivery of V-shaped displays for Hyundai's new Kona series, combining instrument cluster and center information display for enhanced driver convenience. The displays support over-the-air software updates and provide a comfortable, ergonomic viewing experience, making controls easily accessible.
Boris Mergell, Head of User Experience (UX) at CTTAY, said, “With the next generation of large display solutions, we demonstrate how we constantly keep on pushing to realize a unique user experience for our customers. The display was developed and implemented in less than a year. The implementation in record time was made possible through a close and strong cooperation between Continental and Hyundai.”
On September 4, 2023, CTTAY announced a partnership with Google Cloud at IAA MOBILITY 2023 to integrate generative AI into vehicle computers. This enables natural dialogue between drivers and cars, providing information and answering questions. Google Cloud's AI powers conversations and adapts to user preferences, while CTTAY ensures access to specific vehicle information.
Philipp von Hirschheydt, Member of Exec. Board for Automotive Group Sector at CTTAY said, “Together with Google, we are bringing artificial intelligence to the vehicle cockpit and are creating an intuitive experience for drivers. Based on our Smart Cockpit High-Performance Computer, we expect our solution to be ready for production within just 18 months development time. This is how our vision of software-defined vehicles starts to become a reality.”
CTTAY’s revenue grew at a CAGR of 4.6% over the past three years. Its EBITDA grew at a CAGR of 10.3% over the past three years. Moreover, its EBIT grew at a CAGR of 21.2% over the past three years.
In terms of the trailing-12-month Capex/Sales, CTTAY’s 5.37% is 67.1% higher than the 3.22% industry average. Likewise, its 6.98% trailing-12-month Return on Total Capital is 14.3% higher than the 6.11% industry average. Additionally, its 1.09x trailing-12-month asset turnover ratio is 9% higher than the 1x industry average.
CTTAY’s sales for the second quarter that ended June 30, 2023, increased 10.4% year-over-year to €10.43 billion ($11.10 billion). The company’s net income attributable to the shareholders of parent came in at €208.60 million ($222.02 million), compared to a net loss of €250.70 million ($266.83 million) in the year ago quarter.
In addition, its earnings per share came in at €1.04, compared to a loss per share of €1.26 in the prior year quarter. Also, its adjusted EBIT rose 24.1% year-over-year to €497.20 million ($529.20 million).
Street expects CTTAY’s revenue for the quarter ending September 30, 2023, to increase 8.4% year-over-year to $11.49 billion. Its EPS for fiscal 2023 is expected to increase significantly year-over-year to $0.73. Over the past year, the stock has gained 31.8% to close the last trading session at $6.88.
It’s no surprise that CTTAY has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
It has an A grade for Growth and Stability and a B for Value and Quality. Within the Auto Parts industry, it is ranked #8. In total, we rate CTTAY on eight different levels. Beyond what we stated above, we also have given CTTAY grades for Momentum and Sentiment. Get all the CTTAY ratings here.
Stock #1: Garrett Motion Inc. (GTX)
Headquartered in Rolle, Switzerland, GTX and its subsidiaries designs, manufactures, and sells turbocharger and electric-boosting technologies for light and commercial vehicle original equipment manufacturers worldwide.
GTX’s revenue grew at a CAGR of 10.5% over the past three years. Its net income grew at a CAGR of 19.4% over the past three years. Moreover, its total assets grew at a CAGR of 11.9% over the past three years.
In terms of the trailing-12-month EBIT margin, GTX’s 14.15% is 90.6% higher than the 7.42% industry average. Likewise, its 9.65% trailing-12-month net income margin is 118.5% higher than the 4.42% industry average. Additionally, its 30.26% trailing-12-month Return on Total Capital is 395.6% higher than the 6.11% industry average.
GTX’s net sales for the second quarter ended June 30, 2023, increased 17.7% year-over-year to $1.01 billion. Its gross profit increased 19.5% year-over-year to $202 million. The company’s net income came in at $71 million. In addition, its adjusted EBITDA rose 23.2% year-over-year to $170 million. Moreover, its adjusted free cash flow increased 508.7% year-over-year to $140 million.
For the quarter ending September 30, 2023, GTX’s EPS and revenue are expected to increase 10% and 7% year-over-year to $0.23 and $1.01 billion, respectively. Over the past year, the stock gained 19.9% to close the last trading session at $7.59.
GTX’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 is ranked #7 in the same industry. It has a B grade for Growth, Value, Stability, and Quality. Click here to see GTX’s Momentum and Sentiment ratings.
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CTTAY shares were trading at $6.85 per share on Monday afternoon, down $0.03 (-0.44%). Year-to-date, CTTAY has gained 16.63%, versus a 13.88% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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