Can You Build a High-performance Portfolio From These Stocks?
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The auto parts industry is a big deal. There's a good chance you've trusted your safety to some of the parts made by at least one of these companies lately. But I've noticed over time that good products don't always mean good companies producing them. So let's pop the hood and see what's inside.
Well-entrenched is a Good Thing
There aren't many heavy machines that Allison Transmission (NYSE: ALSN) doesn't have a hand, or rather a part, in. Construction, military vehicles, buses and ordinary cars have Allison components inside. I like the fact that Allison is primarily concerned with its namesake component, and I also like that the company is moving into hybrid propulsion systems. So there's a strong moat because of the company's deep market saturation and niche products, a century of history that's seen Allison adapt to the numerous changes in the auto industry and an eye to the future.
The 25.2% profit margins say that they're doing pretty well, and I adore the 7.17 P/E ratio. I can't explain why a strong business like this is trading at such a discount right now, but I could theorize that the business is paying the penalty for being associated with the big auto companies and their shenanigans. I'm not even biased toward Allison because I live only a few miles from one of their plants -- they're just an awesome company.
Companies That Take Risks
Lear Corporation (NYSE: LEA) also has its definite good qualities. The company is looking to make all of its production facilities comply with the highest possible environmental standards. Unfortunately, Lear has also been the target of acquisition attempts by people like the venerable magnate Carl Icahn. Lear also underwent bankruptcy in 2009, which I'm a bit ambivalent about. I appreciate that the board of directors is willing to do something unpopular in the short run for long-term gain, but that seems a bit too hot to handle. The rather small 3.5% profit margin does give me cause to question how stable Lear is long-term in spite of its recovery.
Playing it Safe Pays Dividends
Autoliv (NYSE: ALV) is one of the most deeply-entrenched automotive safety system developers and manufacturers in the world. Working in 29 countries on a wide variety of safety equipment, there's a good chance you know someone who's been spared from serious injury because of Autoliv's efforts. Now they're working on automatic monitoring components that can detect and react to danger faster than you can. I'm not super-big on the 6.1% profit margin, though I understand that mostly comes down to heavy research and development expenses. I do like how the company is trading at a 10.39 P/E, which I can only imagine is due to the under appreciated and somewhat boring nature of its operations. I think Autoliv's 3.6% dividend is going to get a lot smaller once more investors discover this little gem, and I'm definitely taking another look.
Sometimes Spreading Out is a Bad Thing
BorgWarner (NYSE: BWA) looks like an example of a company that's trying to do too many things. I like the fact that BorgWarner operates in 18 countries, though I can imagine that's a serious headache from a book-keeping perspective because of currency interactions between the dollar, the yuan, and the euro. While BorgWarner is the largest company by market cap in this list, tipping the scales at $7.23 billion, it seems like its core functions of transmission and transfer case production would go better without the additional drive train and emissions control systems. I respect that diversification is useful, but I still prefer when a company does one thing really well instead of doing several that vaguely relate to one another. I think some further specialization would turn up that 6.9% profit margin.
Lots of Good Options
Many of the most important parts of a car have companies devoted to them, so you could almost build a portfolio around the parts of a car. I wouldn't recommend that, though. My biggest concerns with this industry are that the big auto manufacturers still have some issues to work through regarding too much production capacity and that the major growth markets may stall in the short term. But I love it when a company builds parts that can go into a lot of different industrial applications. If Autoliv and Allison were trading like Lear is, I'd buy them in a snap. As is, I think they're three good companies. BorgWarner is also no slouch from what I've seen.
pongun has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Autoliv and BorgWarner. 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!