Should You Invest in These 3 Auto Parts Suppliers?

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

According to a report from KPMG, automobile companies are anticipating sales growth opportunities in Asian and North American countries, as European economies are struggling to come out of recession. Overall, global trends of the automobile industry are inspiring for auto-parts manufacturing companies, as the industry posted sales growth of 4% in 2012 year-over-year. The North American automobile market is expected to reach by 15.9 million units in 2013, which is growth of 3.6% annually, whereas the Chinese automobile market is also likely to grow by 14% year-over-year this year.

I have analyzed three auto-parts manufacturing companies, which are able to grow by leveraging their presence in these growing markets.

Potential Chinese market to capture

Johnson Controls (NYSE: JCI) had global market share of 8.4% in the automobile interiors business segment last year. However, its market share is expected to decrease to 8.2% this year due to increasing competition in this segment. This will shrink operating margins to 6.3% this year from 6.5% in 2012.

The company is exploring the sale of electronics part of the automotive interior and electronics division. It accounts for 25% of the total division sales. With this move, Johnson will generate additional cash of $1 billion in the next fiscal year and it will focus on its growing heating, ventilation, and air conditioning, or HVAC segment.

Johnson is a global market leader in HVAC, with global market share of 7.5%. This business contributes around 21.5% to the overall revenue of the company. The market size of HVAC is growing at a good pace and stood at $84 billion as of March. Taking this into consideration, Johnson is expanding its HVAC business in high-growth economies like China. The company will increase its manufacturing capacity at Guangzhou by 30% in this fiscal year.

According to a report by McKinsey, 350 million Chinese residents will move to cities from rural areas by 2020. For this, 50,000 skyscrapers are expected to be built by the end of this decade. It is expected that this will boost the HVAC segment of the company, as its expansion of manufacturing capacity will benefit the company in upcoming years. Production increased by 10% in the first quarter of 2013, which resulted in a sales increase of 31%, amounting to $3.1 billion. Demand for HVAC in China will significantly increase the revenue of the company.

Distinctive product to dominate

BorgWarner (NYSE: BWA) posted higher-than-expected sales of $1.8 billion in the first quarter of 2013. The company has strong dominance over turbochargers, which provide engines with acceleration and are fuel efficient. With the advantage of fuel efficiency, the demand of turbochargers is global. The company's production in the North American market increased by 17.1% in the previous fiscal year and contributed 26% of total revenue. The company estimates production to grow by 4% by the end of 2013, year-over-year.

With the rising fuel efficiency standards worldwide, growth of BorgWarner is certain as it is a leading supplier of turbochargers globally. Fuel efficiency standards of the U.S. are expected to move from the present 24 miles per gallon to 35 miles per gallon in 2016. Moreover, China, European countries, and Japan also anticipate this standard to be implemented by 2014 through 2015. Due to this, demand for smaller and fuel-efficient engines will increase.

Smaller engines with advanced, direct injection improve fuel-efficiency by 15% to 30%; the company has expertise in manufacturing these kinds of engines. Slightly more than one-quarter of total revenue is generated from this segment and it is expected to reach 48% between 2013 and 2015. The company has a long-term opportunity and will continue to grow in this segment once the rules are implemented by the governments of different countries.

Leveraging on North America

Demand for automobiles strengthened in the North American region due to lower lending rates and recovery in the economy. The U.S. economy grew by 2.5% in the first quarter of 2013. Delphi Automotive (NYSE: DLPH) has big customers like Ford and General Motors in this region, and it supplies auto parts to both of them. Sales of General Motors in the first quarter of 2013 were up by 6.5% year-over-year, while sales of Ford increased by 17% year-over-year. Growth of these automobile companies will result in higher revenue for Delphi through the end of the current fiscal year.

The North American market contributes 34% to the total revenue of the company and growth of this region is expected to rise by 3.6% in 2013, year-over-year. Extended development of this region will lead Delphi to 44% growth in 2013. As a result of this, it raised its revenue forecast for 2013 to $16.6 billion from $16.2 billion in the previous year.

In contradiction to that, the European market is a concern for Delphi as lower demand for automobiles was seen in this region. In the first quarter of 2013, the company's revenue declined by 17% quarter-over-quarter due to weak European economies. Furthermore, it has lowered its production estimate for Europe by 7% for 2013. New vehicle registrations in the first quarter of 2013 also declined to 8% quarter-over-quarter in this market. Looking at economic conditions and the production outlook of the company, Europe will remain under pressure until year end. 

Conclusion

China's housing market will push the growth of the HVAC segment of Johnson, while the sale of its automotive interior and electronics division can generate additional cash for the company.

On the other hand, turbochargers will be the game changer for BorgWarner in coming years. Fuel-efficiency standards will push the demand for its engines. I recommend investors buy both of these stocks.

Demand in the automobile sector is strong in North America and is expected to grow further, while the European market remains a concern for Delphi. I advise investors hold this stock until recovery in European countries occurs.

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Shweta Dubey has no position in any stocks mentioned. The Motley Fool recommends 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!

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