How to Profit from the Automotive Recovery - Investment Ideas

It's hard to ignore the resurgence of the U.S. auto industry.

Iconic American car maker Ford Motor Company (F) is trading at a multi-year high and has actually been turning a consistent profit for several quarters now. Meanwhile, a leaner GM (GM) pulled off the biggest IPO in U.S. history last month, raising over $20 billion.

Considering how bad things were in late 2008 and early 2009, this resurgence has been more like a resurrection. But is this the end of the road for the automotive rally?

It certainly doesn't look that way.

Although auto sales are up strong off their lows, they are still well below pre-recession levels and historical trends, leaving plenty of gas in the tank for a continued rally.

Total sales are expected to come in around 11.6 million for 2010, a nice 11% gain from their nadir in 2009. This marks the first year of an increase since 2005.

And experts are predicting more solid gains next year. Management at Ford and Toyota (TM), as well as researcher J.D. Power & Associates, estimate U.S. sales around 13.0 million in 2011.

This number is still below replacement demand too, which experts calculate to be about 13.7 million vehicles.

Assuming the unemployment rate eventually starts to drop and housing shows some signs of life, both "need" and "want" car shoppers will be walking the new car lots. This means sales could revert back to their population-adjusted average around 16 million vehicles in the next few years.

Don't forget the emerging markets either. J.D. Power predicts global auto sales to exceed 80 million in 2012 and 118 million in 2020, up from a record of 71.8 million this year. So even if U.S. sales stay flat, the push from emerging markets should drive profits higher for several companies.

Here are five stocks that will benefit from a continued recovery in new car sales.

TRW Automotive Holdings Corp. (TRW)

TRW Automotive is one of the largest automotive suppliers in the world, specializing in safety systems. The company also has a huge presence in the emerging markets with more than 70% of sales coming from outside the U.S.

Estimates have been surging for 2010 and 2011 as the company has delivered an incredible 92% average upside surprise over the last 4 quarters. The Zacks Consensus Estimate is calling for 377% EPS growth in 2010.

The stock has more than doubled year-to-date, but because estimates have soared too, valuation still looks reasonable. Shares are trading at just 8.7x forward earnings, well below the industry average of 17.1x. It is a Zacks #1 Rank (Strong Buy).

BorgWarner Inc. (BWA)

BorgWarner supplies powertrain products such as transmissions, turbochargers, and four-wheel drive system components.

The company has strung together five consecutive positive earnings surprises as it continues to outperform expectations. The Zacks Consensus Estimate for 2010 is $2.93, up 633% over 2009 EPS.

The stock has soared more than 100% year-to-date, but valuation remains in check. Shares are trading at 23.2x forward estimates, a premium to the 17.1x average, but its PEG ratio is only 0.7. It is a Zacks #2 Rank (Buy) stock.

Autoliv, Inc. (ALV)

Autoliv is a global leader in automotive safety systems such as airbags and seatbelts. The company clearly benefits from continued growth in domestic new car sales, but it is seeing strong demand from the emerging markets too. Approximately 12% of sales come from China, up from 4% in 2007.

Autoliv also just announced a 14% dividend increase - a sign that management believes in the sustainability of the recovery.

Estimates have been rising along with stock. The Zacks Consensus Estimate for 2010 is $6.21, up from $5.64 just 90 days ago. This represents 393% growth over 2009 EPS.

The stock is up more than 80% in 2010, but shares are trading at just 12.7x forward estimates, a discount to its peers. It is a Zacks #1 Rank (Strong Buy) stock.

Nissan Motor Company (NSANY)

This auto manufacturer has seen a huge increase in sales in 2010 - and is grabbing market share in the process. Sales in North America increased an impressive 26.8% in November over the same month in 2009, while overall market share grew from 7.5% to 8.2%.

Although GM's Chevrolet Volt may be grabbing all the headlines, Nissan has just rolled out an all-electric car of its own - the Nissan Leaf. It also costs about $7,500 less than its Chevy counterpart.

Estimates are calling for 356% EPS growth in 2011 as the auto recovery rolls on. The stock is up just 7% year-to-date, however. Shares trade at 11.7x forward estimates with a PEG ratio of only 0.5. It is Zacks #2 Rank (Buy) stock

Sonic Automotive, Inc. (SAH)

Moving up the supply chain - Sonic Automotive is one of the largest automotive retailers in the U.S. The company is based in Charolotte, North Carolina and operates over 170 dealerships across 15 states.

The company recently delivered a solid third quarter marked by strong top-line growth. Analysts expect 39% EPS growth in 2010 and 32% in 2011. The stock is up more than 25% year-to-date. It is trading at 13.8x forward estimates, a discount to the industry average of 17.4x. Its PEG ratio is an attractive 0.7.

Sonic Automotive is a Zacks #2 Rank (Buy) stock

Conclusion

While the automotive industry has already seen a strong recovery from its lows, it looks like we might still be in the early stages of the rally as sales are still a long way from their pre-recession levels.

With earnings estimates rising and the economic recovery gaining some traction, these stocks might just be finding the right gear.

Todd Bunton is the Growth & Income Stock Strategist for Zacks.com.

 
AUTOLIV INC (ALV): Free Stock Analysis Report
 
BORG WARNER INC (BWA): Free Stock Analysis Report
 
NISSAN ADR (NSANY): Free Stock Analysis Report
 
SONIC AUTOMOTVE (SAH): Free Stock Analysis Report
 
TRW AUTOMTV HLD (TRW): Free Stock Analysis Report
 
Zacks Investment Research