Electronics Companies Inside Your Automobile

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

In light of the strengthening automotive market, those that supply the auto OEMs are some of the better situated companies currently. Certainly, auto sales have a reverberating effect on the entire economy that benefit many sectors from auto parts to navigational system makers to upholsterers. Along those lines, a greater proportion of vehicle content is now electronic or semiconductor-based. Numerous companies, including existing manufacturers and electronics contractors, are looking to capitalize on the opportunity.

TE Connectivity - Auto business is a driving force

TE Connectivity (NYSE: TEL) attributes 39% of its revenue to automotive customers and this percentage is likely growing. Products include motor management systems, body electronic applications, safety systems, chassis systems, security systems, and other devices that regulate vehicle functions. In all, TE is putting substantial resources into its auto-product lines in anticipation of market growth.

Revenue and margins in its transportation solutions segment are expanding behind a moderately improving auto market, as well as the increased content per vehicle as previously discussed. In addition to North America, TE is making strides in China, where auto revenue grew 20% year-over-year last quarter.

Along with auto, TE serves a variety of industries, most prominently telecom and telecom networks, where business has been weakening of late. It recently acquired a military/aerospace supplier, Deutsch, and this should also benefit its transportation unit's results.

Given positive demand trends in global auto sales and industrial transportation, TE should enjoy a solid second half of 2013 and beyond. The shares also offer a decent yield of around 2.2%, and are a worthwhile choice for long-term total return.

Cognex -  Counting on rising capital spending by automakers

Cognex (NASDAQ: CGNX), a maker of machine vision products that capture, analyze, and ID products, is more tied to investments in technology by auto manufacturers and other OEMs. Automotive has become the largest customer group within its key factory automation end market. Its products allow producers to lower costs, as well as improve quality and meet stricter regulations.

Offerings include vision systems that inspect and identify parts, industrial ID readers, vision sensors, and software that supports these processes. Cognex is realizing rapid growth in sales of ID products. Moreover, its gross margins are impressive, at more than 75%.

Prospects for increased adoption of Cognex's products by automakers are good, and the company is aiming to capitalize through R&D investments. One example of this is its 3-D vision systems that may also be utilized by the electronics and food and beverage industries. The investment of 10% to 15% of revenue on R&D should help keep Cognex at the forefront of its market and to maintain elevated gross margins.

Shares are priced at a bit of a premium, discounting some of the long-term upside I would expect. Still, they may well be a good holding, considering the strong likelihood that the company will make further investments and acquisitions in growth businesses.

Microchip Technology - Micro-controller applications multiplying in the auto market

Micro-controller producer Microchip Technology's (NASDAQ: MCHP) second-largest end market is likely automotive, as it has extended existing capabilities to that sector. Automotive comfort, safety, and networking applications are key to its business. For instance, its touch controllers are utilized by the automotive industry. All signs point toward further growth in demand for micro-controllers, the semiconductors that allow for embedded control applications.

Microchip expanded its presence in the auto sector last year through the acquisition of SMSC, a semiconductor solutions play with a focus on increasing the amount of data on-board automobiles, as well as in consumer products and PCs etc.

I continue to believe that Microchip will, in the long haul, outperform the broader semiconductor industry due to the growing set of applications for its devices. (See my previous blog on the micro-controller producers). I reiterate that it is a good holding for long-term total return, as, unusually so, a high-yielding semiconductor firm.

Electronics firms and auto

Of these three selections, the closest to a pure-play auto supplier is TE Connectivity. The others, Cognex and Microchip, are hoping for a continued surge in the demand for electronics products by OEMs for production and as vehicle content. Given the economic advantages, including lower cost and higher productivity that can be gained by producers, there seems to only be upside. It is likely that further entrants will aim to capitalize on the trend.

In previous posts, I have mentioned contract manufacturers such as Kimball International and Benchmark Electronics. Keep an eye on the direction of this market and choose stocks accordingly.

See my prior post: Purchase These Four Automotive-exposed stocks, including information on Kimball and others. 

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Damon Churchwell has no position in any stocks mentioned. The Motley Fool recommends Cognex. 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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