Summary
- In this series of articles, I will be reviewing individual industry sectors and selecting my favorite stock picks for 2015.
- For Part 4, I will be reviewing the Auto Components industry sector, taking a look at revenue/earnings growth, valuations, recent performance, and the overall financial stability of companies.
- Out of this group of 33 reviewed stocks, my top five stocks for 2015 are Dorman Products, Drew Industries, Gentex, Magna International, and Strattec Security.
Overview
In this series of articles, I will be taking a look at various industry sectors and selecting what I believe will be outperforming stocks for 2015. In part 1, I reviewed 47 stocks within the Aerospace & Defense industry sector. For part 4, in determining my favorite stocks in this sector for 2015, I will review the following 33 Auto Component stocks:
- American Axle & Manufacturing (NYSE:AXL)
- Autoliv (NYSE:ALV)
- BorgWarner (NYSE:BWA)
- China Automotive Systems (NASDAQ:CAAS)
- China XD Plastics (NASDAQ:CXDC)
- Cooper Tire & Rubber (NYSE:CTB)
- Cooper-Standard Holdings (NYSE:CPS)
- Dana Holding (NYSE:DAN)
- Delphi Automotive (NYSE:DLPH)
- Dorman Products (NASDAQ:DORM)
- Drew Industries (NYSE:DW)
- Federal-Mogul Holdings (NASDAQ:FDML)
- Fox Factory Holding (NASDAQ:FOXF)
- Fuel Systems Solutions (NASDAQ:FSYS)
- Gentex (NASDAQ:GNTX)
- Gentherm (NASDAQ:THRM)
- Goodyear Tire & Rubber (NASDAQ:GT)
- Johnson Controls (NYSE:JCI)
- Lear (NYSE:LEA)
- Magna International (NYSE:MGA)
- Modine Manufacturing (NYSE:MOD)
- Motorcar Parts of America (NASDAQ:MPAA)
- Remy International (NASDAQ:REMY)
- Shiloh Industries (NASDAQ:SHLO)
- Spartan Motors (NASDAQ:SPAR)
- Standard Motor Products (NYSE:SMP)
- Stoneridge (NYSE:SRI)
- Strattec Security (NASDAQ:STRT)
- Superior Industries International (NYSE:SUP)
- Tenneco (NYSE:TEN)
- Tower International (NYSE:TOWR)
- TRW Automotive Holdings (NYSE:TRW)
- Visteon (NYSE:VC)
Step 1
The first step I took to narrow down the list of possible options was to look at the earnings over the past five years of these 33 stocks within the industry sector. I'm removing the following stocks from further review because of their negative earnings growth over the past five years:
- China Automotive Systems
- Cooper-Standard Holdings
- Federal-Mogul Holdings
- Fuel Systems Solutions
- Lear
- Motorcar Parts of America
- Remy International
- Spartan Motors
- Stoneridge
Step 2
I then took the list of ten remaining stocks and checked the revenue growth of each over the past two years. I am removing any stocks that had flat (less than 1%) growth or saw a decline in revenue over the past two years. These stocks include:
- Superior Industries
- Goodyear Tire & Rubber
- Dana Holding
- Cooper Tire & Rubber
Step 3
My next move was to examine the trailing PEG ratio of each of the remaining stocks. I removed any stock that had a PEG ratio over 1 to focus more specifically on fairly valued/under valued stocks. This left me with the following 15 stocks for further review:
- American Axle & Manufacturing
- China XD Plastics
- Delphi Automotive
- Dorman Products
- Drew Industries
- Fox Factory Holding
- Gentex
- Gentherm
- Magna International
- Modine Manufacturing
- Shiloh Industries
- Strattec Security
- Tenneco
- Tower International
- Visteon
Step 4
The next set of data I reviewed was the Fundamental and Value Scores for each of the ten remaining stocks. These scores are calculated by YCharts and I have found them to be very useful when researching investment options. More details on each of the scores can be found here and here.
| Fundamental Score | Value Score | |
|---|---|---|
| American Axle & Manufacturing | 2 | 5 |
| China XD Plastics | 8 | 6 |
| Delphi Automotive | 9 | 7 |
| Dorman Products | 9 | NA |
| Drew Industries | 9 | 9 |
| Fox Factory Holding | 7 | 3 |
| Gentex | 9 | 9 |
| Gentherm | 9 | 3 |
| Magna International | 8 | 8 |
| Modine Manufacturing | 6 | 6 |
| Shiloh Industries | 5 | 5 |
| Strattec Security | 9 | 8 |
| Tenneco | 6 | 5 |
| Tower International | 6 | 5 |
| Visteon | 6 | 4 |
To determine the best stocks for 2015, I am only taking into consideration stocks with values of at least 7 in both categories. Doing this left me with the following six stocks: Delphi Automotive, Dorman Products, Drew Industries, Gentex, Magna International, and Strattec Security.
I included Dorman Products even though a value score was not available given the stock's strong fundamental score along with its comparable pricing when looking at price to book value.
Step 5
My next step was to look at the book value of each company and to remove any stock that has seen a decrease in its book value over the past five years. Delphi Automotive was the only stock to have seen such as decline, leaving me with five final stock candidates.
Step 6
My next step was to look closer at each stock remaining that passed all previous criteria and determine whether or not there were any reasons to eliminate them as great stock candidates for 2015. In doing so, I reviewed the financials of each company, the most recent quarterly report transcripts, and searched for any news items that warranted concern.
Dorman Products
In its latest quarter, the company posted a 11% increase in revenue and a 10% increase in earnings per share compared to the same period last year. Dorman Products also saw its cash flow from operations increase from $15.5M to $28.2. This was the seventh consecutive quarter in which the company saw double digit revenue growth.
The company did see a slight decline in gross profit margin but continues to invest in its future through new products as well as other improvements such as its new ERP software system. Dorman also repurchased a significant amount of stock during its latest quarter.
Drew Industries
In its latest quarter, the company posted a 17% increase in revenue and an increase in earnings per share from $0.62 last year to $0.64. Drew Industries continues to position itself well for its strong revenue growth as it not only invests in strong acquisitions but also makes improvements to improve the company's capacity.
I believe the company's acquisitions of Innovative Design Solutions, Duncan Systems, and the Power Gear and Kwikee brands will help Drew Industries deliver strong long term results.
Gentex
In its latest quarter, the company posted a 22% increase in revenue and a 29% increase in earnings per share compared to the same period last year. Gentex also saw an improvement in its gross profit margin from 36.7% to 39.5%. The company attributed the improvement to:
the impact of the HomeLink® acquisition, improvements in product mix, and purchasing cost reductions, which were partially offset by annual customer price reductions
The company's investment in the HomeLink acquisition as well as its research and development into new technologies should spur continued future growth for the company. Even with an estimated decline in vehicle production for Q4, Gentex estimates a 10%-15% increase in net sales for the quarter.
Magna International
In its latest quarter, the company posted a 6% increase in revenue and an increase in earnings per share from $1.39 last year to $2.19 this year. While sales did increase in the quarter, complete vehicle assembly volumes actually decreased by 5%. Magna saw strong EBIT numbers from its North America, Europe, and Asia segments, but continues to face challenges in its South American market.
Strattec Security
In its latest quarter, the company posted a 54% increase in revenue and an increase in earnings per share from $0.91 last year to $2.55 this year. With increases in sales from each of the company's customer groups along with improvements in its balance sheet, Strattec appears to be firing on all cylinders. The company's CEO had this to say about a few of the company's strong efforts and recent achievements:
It resulted in an unusually good quarter in which sales and profit broke our previous records. In addition to the positive metrics, we completed a four-year agreement with our unionized Milwaukee associates and were awarded Supplier of the Year by Ford Rotunda for outstanding service to their dealers. That recognition makes us especially proud, as it highlights the service side of our business that has historically been overshadowed by our manufacturing. It is also a nice follow on to last year's Supplier of the Year award from Chrysler."
Conclusion
Looking at the chart below, you can see that each of the five remaining companies have outperformed the S&P 500 in terms of total returns over the past five years.
STRT Total Return Price data by YCharts
I believe each of the five companies have a strong chance to match this feat in 2015 as well. Out of the five, Strattec Security is my favorite due to its impressive recent quarterly performance and low valuation. Even though, the stock is up over 70% over the past year, it is down significantly from its 52 week high of 110.96 and I believe is currently priced at a very attractive entry point. In terms of a longer term holding, Gentex is another option I like due to its attractive dividend yield and strong dividend growth over the past five years. However, due to a recovering economy and strong fundamentals from each company, I feel that all five have a tremendous opportunity to outperform the market in 2015.
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