Despite the macroeconomic challenges, the auto industry has been performing well due to robust demand and the easing of supply chain constraints. Despite not relying entirely on new vehicle sales, the auto parts industry is expected to perform well due to a rise in demand for new vehicles, robust aftermarket sales, rising vehicle prices, and the increasing usage of advanced automobile components.
Given this backdrop, it could be prudent to add fundamentally strong auto parts stocks Magna International Inc. (MGA), Genuine Parts Company (GPC), and Modine Manufacturing Company (MOD) to one’s watchlist.
Before diving deeper into their fundamentals, let’s discuss why the auto parts industry is well-positioned for growth.
After a few years of lull, automobile sales have picked up this year. According to Cox Automotive, new vehicle sales are expected to be 15.4 million in 2023 and used vehicle sales are expected to be 35.7 million this year. Although the auto parts industry does not rely too much on new vehicle sales, the uptick in new and used vehicle sales is expected to drive the demand for auto parts.
With vehicle prices rising, sparse inventory, and the possibility of interest rates remaining higher for longer, the affordability of new vehicles is expected to remain challenging in the near term. This will likely propel buyers to defer new car purchases and keep existing cars longer. As a result, the demand for auto parts will likely get a boost as older vehicles need more maintenance and spare parts than cars straight out of the showroom.
Additionally, battery electric vehicles (BEV) are on the rise and are slowly replacing internal combustion engine (ICE) vehicles. The move to BEV boosts the demand for cutting-edge auto parts such as digital instrument clusters, infotainment systems, battery management systems (BMS) and advanced telematics.
Moreover, the pandemic has given rise to automotive DIY. This hobby of trying to fix one’s own vehicle is also driving sales of auto parts companies. The global auto parts industry is projected to grow at a CAGR of 6.3% to reach $939.21 billion by 2028.
Considering these conducive trends, let’s analyze the fundamentals of the three Auto Parts stocks to watch, beginning with the third choice.
Stock #3: Magna International Inc. (MGA)
Headquartered in Aurora, Canada, MGA designs, engineers, and manufactures components, assemblies, systems, subsystems, and modules for original equipment manufacturers of vehicles and light trucks worldwide. It operates through four segments: Body Exteriors & Structures, Power & Vision, Seating Systems, and Complete Vehicles.
On September 4, 2023, LG Magna e-Powertrain, the joint venture (JV) between LG Electronics (LG) and MGA, announced at the IAA Mobility 2023 that it is expanding its footprint with a new facility in Miskolc, Hungary. The facility is scheduled for completion in 2025, with production starting in 2026.
Magna Powertrain’s President Diba IIunga said, “Adding the new Hungary facility marks another milestone for the JV in executing its growth plan. With this new capacity – the JV’s first in Europe – LG Magna e-Powertrain is well positioned to keep pace with customer demands and increases in global EV production.”
On June 1, 2023, MGA announced that it had acquired Veoneer Active Safety from SSW Partners. The acquisition will expand MGA’s active safety portfolio and increase the scale of sensor, software and systems engineering capabilities.
In terms of the trailing-12-month Capex/Sales, MGA’s 5.10% is 59.5% higher than the 3.20% industry average. Likewise, its 1.37x trailing-12-month asset turnover ratio is 36.5% higher than the 1x industry average.
MGA’s sales for the second quarter ended June 30, 2023, increased 17.3% year-over-year to $10.98 billion. Its adjusted net income attributable to MGA increased 77% year-over-year to $430 million. The company’s adjusted EBIT rose 68.4% year-over-year to $603 million.
Also, its adjusted EPS came in at $1.50, representing an increase of 80.7% year-over-year. In addition, its cash provided from operating activities increased 29.9% year-over-year to $547 million.
Analysts expect MGA’s EPS and revenue for the quarter ended September 30, 2023, to increase 23.5% and 11.8% year-over-year to $1.32 and $10.36 billion, respectively. Over the past six months, the stock has declined 4.7% to close the last trading session at $49.48.
MGA’s POWR Ratings reflect this positive outlook. It has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #31 out of 61 stocks in the A-rated Auto Parts industry. It has a B grade for Growth and Stability. Click here to see the other ratings of MGA for Value, Momentum, Sentiment, and Quality.
Stock #2: Genuine Parts Company (GPC)
GPC is a service company that distributes automotive and industrial replacement parts. Its segments include Automotive Parts Group and Industrial Parts Group.
On August 1, 2023, GPC announced that its wholly-owned automotive distribution company Alliance Automotive Group (AAG) acquired Recambios y Accesorios Gaudi, S.L. GPC’s Chairman and CEO Paul Donahue said, “We are pleased to expand our European Automotive footprint with the addition of Gaudi.”
“With this acquisition, we are broadening our leadership position in Spain, Europe’s fifth largest automotive market, while extending the opportunities for rollout of the NAPA brand and enhancing the profitability of our European business,” he added.
On March 22, 2023, GPC announced the selection of Google Cloud as the innovation partner for its business transformation. GPC expects to leverage Google Cloud offerings to optimize the technology infrastructure. Google Cloud’s advanced data and analytics platforms will enable supply chain modernization around inventory visibility, facility productivity, and logistics.
In terms of the trailing-12-month net income margin, GPC’s 5.44% is 25.4% higher than the 4.33% industry average. Likewise, its 31.89% trailing-12-month Return on Common Equity is 181.3% higher than the industry average of 11.34%. Furthermore, the stock’s 1.38x trailing-12-month asset turnover ratio is 37.4% higher than the industry average of 1x.
For the third quarter ended September 30, 2023, GPC’s net sales increased 2.6% year-over-year to $5.82 billion. Its adjusted net income rose 10.7% over the prior-year quarter to $351.20 million. The company’s gross profit increased 6.5% year-over-year to $2.11 billion. Its adjusted EPS came in at $2.49, representing an increase of 11.7% year-over-year.
For the quarter ending December 31, 2023, GPC’s EPS and revenue are expected to increase 7.1% and 2.4% year-over-year to $2.20 and $5.65 billion, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past month, the stock has declined 9.8% to close the last trading session at $128.93.
GPC’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which translates to Buy in our proprietary rating system.
It has a B grade for Growth and Quality. Within the same industry, it is ranked #18. To see the other ratings of GPC for Value, Momentum, Stability, and Sentiment, click here.
Stock #1: 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. The sale would help the company focus its resources on high-margin technologies with strong growth drivers.
On August 29, 2023, MOD announced the sale of facilities in Temecula, California, and Tampa, Florida, to Protecall. MOD’s President and CEO Neil Brinker said, “The divestiture of these Coatings facilities shows our commitment to focusing on proven technologies and services that can accelerate profitable growth, such as product licensing.”
In terms of the trailing-12-month EBIT margin, MOD’s 8.09% is 11.2% higher than the 7.28% industry average. Likewise, its 7.72% trailing-12-month net income margin is 78.1% higher than the 4.33% 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 first quarter 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 EPS came in at $0.85, representing an increase of 165.6% year-. Also, its adjusted EBITDA increased 90.5% year-over-year to $80.40 million.
Street expects MOD’s EPS and revenue for the quarter ended September 30, 2023, to increase 37% and 6.5% year-over-year to $0.66 and $616.18 million, respectively. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 143.4% to close the last trading session at $39.97.
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 #11 in the Auto Parts industry. It has a B grade for Growth, Sentiment, and Quality. Click here to see MOD’s Value, Momentum, and Stability ratings.
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GPC shares were trading at $128.06 per share on Friday morning, down $0.87 (-0.67%). Year-to-date, GPC has declined -24.83%, versus a 9.21% 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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