3 Stocks to Invest in the Improving Auto Market

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

The automotive industry continues to recover at a rapid pace. The decline in the unemployment rate, coupled with low interest rates, have propelled automotive sales in the United States. Although a typical strategy to gain exposure to the automotive market is to invest in car manufacturers, a Foolish investor may also be interested in parts manufacturers. Auto parts companies should fare well as auto demand increases. The following three stocks may be bought as a basket to expose a portfolio to the automotive industry.

The automaker

Ford (NYSE: F) is one of the giants in the automotive manufacturing business. The company is developing faster, more comfortable, and more fuel-efficient vehicles. As Ford continues to develop more fuel-efficient cars, its presence in the European and Asian markets should continue to grow--and that's important because gas prices in Europe and Asia are sometimes more than double that of the U.S. 

From a fundamental analysis perspective, Ford trades with a P/E ratio of 10.6, and a forward P/E of 9.45, while the industry’s P/E average is around 14. Ford reported an outstanding first quarter as it increased net income to $1.6 billion, an increase of $215 million over last year. The Mustang sports car developer also saw a steep increase in units sold in North America, despite some weakness in international markets.

Regarding the future, Ford is poised for more growth.  The domestic market continues to strengthen and the Asian market is improving despite fierce competition from Honda and Toyota.  Sales in European markets increased for the first time since 2011, which should boost revenue.  Ford also increased its sales by 14% in May, the best number for May since 2005.

A good year

Despite recent underperformance by Goodyear Tire & Rubber Co. (NASDAQ: GT), the stock is ready for a rebound. Since auto sales are increasing, the demand for tires goes right along with it. Goodyear continues to be a top choice for the supply of tires to car manufacturers.  North America makes up for 50% of its revenue per year, but one of the key drivers will be higher demand in emerging markets such as Latin America and Asia. Furthermore, revenues from Europe should start picking up as demand for autos strengthens.

From a fundamental perspective, the company’s margins have been steadily improving since 2010.  Goodyear hopes to increase its North American margins to 5% from 3% over the next several years. The company’s P/E of 17.3 is below the industry average of 20.2. Although its sales fell 12% to $4.8 billion last quarter, its net income increased $37 million because of margin expansion.

Auto parts

Magna International (NYSE: MGA) designs, develops, and manufactures automotive systems, modules, and components which are sold to original equipment manufacturers (OEMs). Its operations are primarily in North America, Europe, and several emerging markets such as Latin America.

The fundamentals look good as the company trades around an 11 P/E, while the industry average is 19.9. Its price to book ratio is also below the industry average. Further, revenue growth for the last 3 years is 21%, while the industry average is 4.5%. Its sales increased 9% to $8.5 billion for the first quarter of 2013. Its net income grew to $369 million, or $1.57 per share, from $343 million, or $1.46 per share year over year.

Management expects revenue in 2013 to range between $32 billion to $33.4 billion as a new emission standards boost demand for fuel efficient components. Moreover, since its presence in the domestic and European markets is strong, sales should move in unison with Ford.  Magna has a solid balance sheet, trades below the industry average in many financial metrics, and has catalysts for growth.

A foolish note

The automotive industry is improving. And these companies are excellent options to gain exposure to this market. Ford’s performance has been steadily increasing, and the car maker should gain market share in the European markets.  As the demand for tires increase, Goodyear should see a push in revenue. Lastly, the demand for Magna’s products should increase as companies like Ford boost auto production to meet rising global demand.

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Robinson Roacho has no position in any stocks mentioned. The Motley Fool recommends Ford. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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