It’s fair to say that the auto parts sector hasn’t been in its favour for a while. Global production of passenger cars has not grown year on year since 2017, and a shortage of semiconductors has increased global production of light vehicles (LVP) by just 1.2% in 2021. However, leading industry observer IHSMarkit expects LVP to increase by 9% in 2022 .
With the industry poised for a multi-year recovery starting in 2022, it’s time to take a look at the auto parts manufacturers Autolev (NYSE: Value Added Tax) And Magna International (NYSE: MGA), car paint company Axalta coating systems (NYSE: AXTA).
with automation, the largest auto retailer in America, reporting a massive 18% increase in same-store sales in its most recent third quarter, it’s clear that the demand for cars there. The problem is supply and the ability of automakers to ramp up production in the face of a shortage of semiconductors. However, most industry observers expect this problem to be alleviated in 2022, leading to the production surge discussed earlier.
This is great news for the airbags, seat belts and Autoliv steering wheel manufacturer. The stock buy case is not just based on the multi-year recovery in LVP; Autoliv also has an opportunity to grow further from its end markets.
Management believes it can grow 4% more than global LVP from 2022-2024, for example, with 9% global LVP growth in 2022, Autoliv could grow 13%. After the initial rebound in LVP, Autoliv expects 4% to 6% growth from 2024 onwards.
The company’s growth aspirations come from capturing market share – it is already the dominant player in its end markets and has a track record of winning in the market. For example, 65% of sales come from airbags and steering wheels, taking 42% and 37% of market shares, respectively. The remaining 35% of sales come from seat belts, with Autoliv having a market share of 44%. According to SEC filings, Autoliv had a compound annual growth rate (CAGR) for passive safety products of 4.4% from 1997-2020, compared to an LVP compound annual growth rate of just 1.3%. In doing so, Autoliv’s total market share increased from 27% to 42%.
Additionally, the increased focus on safety (passenger side airbags, higher value steering wheels, active seat belts, etc.), not least in self-driving cars, means that Autoliv can increase the amount of its content on the vehicle.
Trading 16.5 times Wall Street analysts’ Free Cash Flow (FCF) forecast in 2022, Autoliv is an attractive stock for long-term investors.
This auto products and systems company has had products on two out of three cars launched in 2019, and its customer list reads like the “who’s who” in the auto industry. Moreover, its product range extends to the entire vehicle. Magna offers solutions from exoskeletons and body to strength, visibility and seating.
Of course, the product range can be considered a blessing and a curse simultaneously. For example, it’s no secret that automakers are embarking on a long-term shift toward hybrid and electric (EV) vehicles from conventional internal combustion engines (ICE). Unfortunately, this is something that could challenge the long-term prospects of Magna ICE transmissions, fuel tanks and all-wheel drive systems.
However, the vast majority of Magna sales (lighting, seats, mirrors, body, etc.) Furthermore, a greater portion of sales (compared to “at-risk” sales) come from products (electronic drives, battery enclosures, and sensors) that benefit from the switch from ICE to EV. Meanwhile, the department continues to invest in electrification technologies to prepare for the transition.
Trading at just 14.3 times Wall Street analysts’ forecasts for the FCF in 2022, Magna International is another excellent value option for investors.
Axalta coating systems
Last but not least, Axalta Coating Systems offers investors an under-the-radar way to play the recovery in LVP and beyond. The paint company has great exposure to the automotive market. About 40% of its sales come from the repainting market, 23% from the light vehicle market, 7% from the commercial vehicle market, and the rest comes from the industrial coatings business.
As such, the stock purchase case is dependent on the marginal growth opportunity in the light and commercial vehicle original equipment (OEM) market coming from an increase in LVP. Moreover, reopening the economy should result in more miles traveled, and therefore more accidents and collisions, driving up demand for refinished paint. Axalta is the leading player in the repainting market and the number two player in the light vehicle OEM market.
Unfortunately, all the leading paint and coating companies suffered from a combination of rising raw material costs and supply chain issues in 2021. However, these headwinds could turn into tailwinds if these issues are settled in 2022.
Trading at just 15.1 times Wall Street analysts’ expectations for the FCF in 2022, Axalta is another excellent, valuable option for investors.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of the Motley Fool Premium Consulting Service. We are diverse! Asking about an investment thesis — even if it’s our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.