An Auto Recovery Is Good for These Auto Parts Suppliers

Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The overall macro picture for the U.S. economy has been improving. Employment is rising and consumers are spending again. One area in particular where they are spending is the auto sector. Many consumers held off from purchasing during the financial crisis and have now started trading in their old cars for new ones. The Big 3 auto companies have seen sales pick up and their fortunes turnaround. For me, I always like to dig in and see who benefits besides the obvious names. In this rebound, the group to focus on is the auto parts suppliers.

The auto parts supply giant

Johnson Controls (NYSE: JCI) is a global auto parts supplier operating in more than 150 countries with over 168,000 employees. The company makes lead-acid batteries and advanced batteries for hybrid and electric vehicles. The biggest imprint that Johnson Control has on the automotive sector, though, is in car interiors. The company provides all aspects of a car interior including overhead systems, floor consoles, door systems, instrument panels and seating configurations. Besides the automotive sector, Johnson Controls also provides heating and cooling systems for buildings.

Johnson Controls has been investing in its various businesses the last few years to make them more efficient. Last year the company spent $1.8 billion in capital expenditures and this is on top of the $1.3 billion spent in 2011. The result should be increased margins and cash flow.

Looking forward, Johnson Controls trades at a forward P/E of 11.54. Analysts are optimistic that the company's investments and turnaround initiatives will pay off in the form of earnings. Forecasts for this year average $2.61 per share according to Zacks. Last year, Johnson Controls earned $1.35 per share.

Perhaps the most enticing aspect to owning Johnson Controls is its steady dividend. The company has been steadily increasing its dividend for decades, except in 2009 during the financial crisis. The dividend increases resumed in 2010 and the dividend is now $0.76 per share for a yield of 2.1%. The dividend payout ratio is 53%, and I see the company continuing to increase the dividend as earnings rise.

A reborn company

Delphi Automotive (NYSE: DLPH) has had a colorful history and was deeply affected during the financial crisis and filed for bankruptcy protection. Delphi produces auto components and has over 118,000 employees worldwide. The company's main focus is on the North American and Chinese markets, where the company sees the most potential. Europe remains weak for Delphi just like every other automotive-related company.

In the first quarter, Delphi repurchased $122 million in stock and initiated an annual dividend of $0.68 per share for a yield of 1.20%. The company has $525 million left on its authorized share repurchase program, and the dividend payout ratio is only 5%. Look for the dividend to increase and for the company to continue buying its stock.

Going forward, Delphi expects operating cash flow to average roughly 75% to 80% of EBITDA. The company plans to use 35% to 40% for capital expenditures, 10% to 15% to fund the dividend, and the balance will be for share repurchases and possible acquisitions. This is a great use of cash and Delphi's management does a great job at capital allocation. Evidence of this is the fact that the company has reduced the share count from 686 million in 2010 to 314.5 million in the first quarter through share buybacks, the majority of which occurred between $21 and $35 per share.

Can't beat the sound with this company

Harman International (NYSE: HAR) sound systems are in more than 80% of the world's luxury cars. Its brands include AKG, Harman Kardon, JBL, Infinity, Lexicon and Mark Levinson. The company also makes audio equipment used in recording studios and cinemas.

In the most recent quarter, earnings improved from $0.59 per share in the prior quarter to $0.79 per share. For fiscal 2013, earnings are now projected to be $3 per share compared to prior guidance of $2.70 to $2.90 per share. Revenues, however, decreased by 3.1% due to the slowdown in Europe and a 12% drop in European auto production.

Going forward, Harman continues to be a very shareholder-friendly company. The company increased the share repurchase authorization by $200 million. This is in addition to the $70 million left on its previous buyback. Harman also announced that it was doubling the quarterly dividend from $0.15 per share to $0.30. The dividend yield is now 2.3% and that makes the stock attractive for income investors. Harman can afford these moves with over $434 million in cash on the balance sheet and only $294 million in debt. The dividend payout ratio is still only 40%.

Growth is also likely to come from the company's continued innovations. So far this fiscal year, Harman has filed 300 new patents and now has more than 4,600 patents in its portfolio. At the Geneva Auto Show, Harman and Ferrari showcased the use of Apple's Siri technology. Partnering with Apple is a great move for Harman and illustrates its strong presence in the audio space.

Foolish assessment

My favorite company in the space is Harman International. For one, I love their products. Two, I like the moves it is making in returning cash to shareholders and I think it's positioned to grow as the top choice in the auto luxury market.

My second choice would be Johnson Controls. The stock has risen 35% in the past year and has a history of increasing the dividend. The capital expenditures Johnson Controls has made over the past two years should start to pay off for the company starting this year. Lastly, Delphi is a great company, but I would hold off on purchasing shares as they have doubled in the past year.


Mark Yagalla has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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