Are These 3 Stocks Auto-matically Buys?
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
On a consistent basis I'll use a stock screener to try to find new investment opportunities. In the last year or so, one of my favorites has become The Motley Fool's CAPS Screener. The primary reason that I use the screen more than others is that it combines financial information along with the opinions of the CAPS community. While CAPS members are not infallible, many companies that score the top ratings of either 4 or 5 stars have strong financials, consistent performance, and good growth. Since I favor companies that are both growing and pay a decent yield, I recently ran a screen asking for: yield of at least 2%, CAPS score of 4 or 5 stars, a $500 million or greater market cap, and in the automotive industry. Of the relatively few stocks that the screen returned, there were three that looked like they could be attractive options at this time.
One of the primary reasons I selected a screen asking for companies in the automotive industry is that I expect this industry to outperform given positive economic growth. I've written about this before, and it still holds true that there is tremendous pent up demand for automotive sales that will take years to extinguish. The three companies I want to compare all participate in the automotive interiors segment. The companies I'm referring to are Autoliv (NYSE: ALV), Gentex (NASDAQ: GNTX), and Johnson Controls (NYSE: JCI). Since all three companies stand to benefit from higher demand for new vehicles, let's see which one could be the best investment.
When most people look at different companies in the same industry, the first thing they check is the current valuation and analysts' expectations for growth. Looking at these three companies, we can see that there is a wide variation in growth expectations.
As you can see, Johnson Controls has the highest expected growth rate and the second-highest P/E ratio. While there might be reasons behind why Johnson Controls is valued so low compared to its growth rate, if these numbers hold up Johnson Controls would be the best value. (Autoliv - 1, Gentex - 2, Johnson Controls - 3)
The challenge of course for investors is determining if analyst expectations are realistic. What I've found is that companies that have beaten analyst expectations in the past generally continue to beat expectations going forward. Unfortunately, the tough economic climate of the last year has been a challenge for all three companies in performing up to what analysts expected:
As you can see, none of these companies have been consistently meeting earnings expectations. In each case they've actually missed estimates by at least 1% on average per quarter. However, in a situation where the lowest number of misses is the best result, Autoliv comes out ahead. Gentex comes in second by just the smallest margin. Unfortunately for Johnson Controls investors, their company has performed the worst. (Autoliv - 3, Gentex - 2, Johnson Controls - 1)
One number that I always use when comparing companies in the same industry is their free cash flow per $1 of sales. This helps tremendously as it gives investors an idea of which company can produce the most free cash flow on a relative basis. Using this measure, Autoliv is the clear winner, producing $0.06 of free cash flow per $1 of sales in the most recent quarter. Johnson Controls comes in second at $0.02 and this leaves Gentex last, showing negative free cash flow over the last three months. (Autoliv - 3, Gentex - 1, Johnson Controls - 2)
Last but not least, it always makes sense to compare companies' balance sheets to make sure the one you choose has the wherewithal to make it through tough times. This measure shows a significant difference between Autoliv and Gentex versus Johnson Controls. The first two companies sit on a net cash position, whereas Johnson Controls shows a significant amount of long-term debt. On a relative basis, Gentex appears the best value, as its cash of over $550 million represents 22% of its current market cap. Autoliv is the second best option, with its net cash representing 11.89% of its market capitalization. Johnson Controls is clearly the weakest of the three companies when it comes to their balance sheet, with a net long-term debt level of $4.4 billion. Normally I would award this category to Gentex. However, because the company is showing negative free cash flow, there is a good possibility that their cash balance will need to be used to fund operations. This leaves Autoliv as the clear winner since they have both positive cash flow and a net cash position. (Autoliv - 3, Gentex - 2, Johnson Controls - 1)
When we add up our scores, we find Autoliv - 10, Gentex - 7, and Johnson Controls- 7. With Autoliv winning three of the four categories, it's no surprise the company comes out on top. However, while the company does have the highest free cash flow, investors might worry about analyst projections of relatively low earnings growth going forward. The Mötley Fool CAPS community rates the company five stars. Multiple members cited the potential improvement in the auto industry, the company's over 3% yield, and significant share repurchases as positive factors. This scorecard isn't meant to serve as a formal recommendation, but rather as a starting point for your own research. If you believe the auto industry will recover as I do, all three of these companies should benefit, but at least based on the numbers we looked at, Autoliv could post the best performance.
MHenage has no positions in the stocks mentioned above. The Motley Fool owns shares of Gentex. Motley Fool newsletter services recommend Autoliv. 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.If you have questions about this post or the Fool’s blog network, click here for information.