Betting on Auto Suppliers

Car Keys and Money
Car Keys and Money

Cars are back in the fast lane.

Automakers are ramping up production and upping their sales figure of cars.

As the U.S. auto industry makes a comeback, auto suppliers and auto retailers are reaping the benefits. In the past six months, auto suppliers like auto-nation, Borg-Warner, and Johnson controls all delivering double-digit returns.

Bullish on Auto Suppliers

Ravi Shanker, auto analyst at Morgan Stanley is bullish on the auto suppliers. “as production picks up the suppliers benefit and we're focused on the companies best positioned to capitalize on the operating leverage and the broader secular growth opportunity,” said Shanker. Shanker is very bullish on the auto recovery and forecasts 14 million vehicles to be sold in 2011 and 15 million in 2012. “Higher expectation of production and auto suppliers best positioned to benefit as these companies prepared for the worst, so the group is well positioned on a cost basis. We think pent up demand reached a peak and the average car has about 100,000 to 150,000 miles on it and so replacement is needed, plus credit coming back will be the catalyst,” Shanker said.

Shanker’s Auto Supplier Picks

Shanker believes companies most exposed to end-markets will do well. End markets is defined as fuel efficiency, safety, emissions and comforts and convenience. Shanker’s picks include BorgWarner, Johnson Controls and Magna International. BorgWarner is exposed to the broader trend in fuel efficiency. Johnson Controls are exposed to fuel economy plus interior and seating suppliers, so they include fuel and comfort and convenience.

Risks Factors

The group is tied to the macro economy and that will always be a disclaimer here. Shanker is also concerned about launch costs and supplier costs could be an issue and materials headwinds, materials costs are not an immediate near-term concern, but one to watch.

Another Bullish View

David Silver, auto analyst with Wall Street Strategies is fairly bullish on the sector too. Silver expects the companies that are pushing the envelope on fuel efficiencies will come out on top. “We will not see the same type of strong growth within the auto industry in 2011 as we saw in 2010. I don't expect as strong of growth for auto sales nor production; we're forecasting 13.5 million for industry sales for 2011,” said Silver.

Silver believes the auto suppliers are in a much better financial position and their the production levels and manufacturing costs are in-line make a profit. “Fuel efficiencies and as automakers work to conform to the new CAFE standards, companies in that arena will benefit most,” said Silver.

Silver’s Auto Supplier Picks

Silver Picks for auto suppliers are BorgWarner & Magna International and Johnson Controls is also well positioned to do well with lithium batteries. Plus, American Axle -- as Chrysler continues to improve and GM increases production.

Other Picks

Silver is also bullish on companies like Group 1 Automotive and CarMax. “As consumers look for ways to improve the life of their vehicles, the group will do well,” said Silver.

Risk Factors

For these auto retailers, Silver said the risk is another big drop in auto sales. Auto incentives are likely to pull back over next 3-6 months and if they pull back too quickly, you'll see a drop in sales, said Silver.

David Silver: no conflicts and no personal ownership

Ravi Shanker: No personal ownership
Investment Banking Client: BorgWarner and Johnson Controls

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