And Now, Turn Your Attention to the Parts Makers
John-Erik is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The Detroit auto show had a lot of us buzzing about the carmakers last week. Let’s face it, new models and new innovations are exciting. But investors might be wise to pay some attention to auto-industry companies that weren’t making headlines at the auto show.
BorgWarner (NYSE: BWA) may have may have slipped under your radar last week, but it shouldn’t have. The Michigan-based parts supplier shot up 14 percent after revving its outlook for 2012. The company now expects earnings to grow at 23% to 27% over last year, with sales growth in the area of 10-12% over 2011. Even after last week’s surge, BWA still sells for 16.7 times earnings. At its projected rate of growth, it’s now selling at a forward P/E of 13.
And despite some serious appreciation in value over the past couple years, BorgWarner has a bright future. The company’s focus is on making components that maximize fuel efficiency and reduce emissions from gasoline and diesel engines. High fuel prices, consumer values and government regulations should only help to heighten the need for those products in years to come.
BWA counts just about every major manufacturer among its customers, as well as John Deere. Electric cars like Nissan’s Leaf and GM’s Volt have generated a lot of attention over the past couple years. But the gasoline engine is not going away anytime soon, especially with American oil discoveries on a furious upward clip. BWA’s products are making the good old gas engine kinder to the environment, not to mention easier on the wallet at the pump.
So while BWA has had an incredible run from the lows of 2009 -- including a near-double in 2010 -- it still has fuel in the tank. Maybe we can chalk that up to the company’s fuel-efficient parts. Any pullback in price could make BorgWarner look cheap. It’s my smallest holding, so I’m willing to add more. I’ll be waiting to see if the stock takes a breather here before adding shares.
And one to watch for ...
Johnson Controls (NYSE: JCI), another maker of auto parts, reports earnings this Thursday. Johnson Controls has increased sales each quarter for the past seven quarters.
JCI’s sales have grown an average of more than 21% percent per year since 2009, and eclipsed its 2008 sales mark of $38 billion last year. It also bested its 2008 earnings, registering $2.36 per share in 2011. Yet Johnson’s selling at cheaper prices than it was in 2007 and 2008. It currently sells at a P/E of 15.
JCI makes car seats, consoles, instrument panels and electronics for Ford, GM, Daimler and other carmakers. It’s the largest car seat supplier in the world. It also makes batteries for hybrid and electric vehicles, as well as for advanced “start-stop” gasoline engines. And it’s building a manufacturing plant to make lithium-ion batteries for hybrids -- with $300 million in help from Uncle Sam. So, like Borg-Warner, JCI has a foot in the future of automotive sales as well as one in the present.
Johnson is far from a pure play on car and truck sales. About 36 percent of its sales in 2011 were from a host of other products, including all types of controls for buildings, whether it be for lights, security, heating or air conditioning. But don’t let that scare you away. Many of Johnson’s building products are designed to improve efficiency, another trend we can expect to continue. If JCI interests you, tune in for Thursday’s quarterly earnings report.
There's always something to worry about
Slowing economies in Europe and other parts of the world could hurt suppliers, including BWA and JCI, since car sales will lag. Inflationary pressures and rising raw materials costs also pose risks.
But BWA’s forecast for growth accounts for those factors, so investors should take that as a sign of confidence from the parts manufacturer. These two companies look attractive at today’s prices and are positioned to do well in the years ahead. Investors would be wise to give them a test drive.
Motley Fool newsletter services recommend BorgWarner. The Motley Fool has no positions in the stocks mentioned above. jekoslosky has positions in BorgWarner and Ford. 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.