3 Auto-Parts Companies to Buy Despite Heavy European Exposure
Zain is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A declining European economy and the recent debt crisis in that part of world have given money managers some ‘food for money.’ One way to make money has been to short European automakers like Peugeot or Renault. However, another way to play this theme has been to short those auto-part manufacturers that heavily rely on the European economy for their revenue. And given that there are no bullish viewpoints on the European market in the near term, money managers fend it off as a long-term money making option.
The following chart shows their level of exposure to Europe:
The question remains here: is it the right choice to short these stocks? Let’s have a look at each and see.
BorgWarner - high margins
BorgWarner manufactures a variety of engine and drivetrain components that increase fuel efficiency and reduce emissions, such as turbochargers and automatic-transmission components. Demand for BorgWarner’s products is strong, driven by both consumer “pull” and government “push” elements, and will only increase over time as the rising amount of vehicles in emerging markets upwardly pressures fuel prices.
BorgWarner already enjoys the second-highest margins in the sector, in part driven by the fact that many of the products it manufactures are of a highly engineered nature, leading to high technical barriers to entry and market concentration. Still, the combination of rapid top-line growth and financial discipline is expected to allow for top-tier operating-margin expansion. High European exposure is concerning in a downside scenario, but is offset in part by an ideal customer mix within Europe and diversification into higher-growth Asian markets.
Gentex: customer mix
Gentex is the world’s leading provider of electrochromatic auto-dimming mirrors, a market it created, as well as technologies it has incorporated into the mirror, including – most recently – rear camera displays. Gentex is viewed as a highly innovative technology company that happens to operate within the auto parts sector.
Through the constant development of new products and technologies, it has generated a 20% revenue CAGR over past 25 years. Rather than pursuing growth at the expense of margin, Gentex’s rapid sales growth through the development of new products and features on existing products have allowed it to offset annual customer price cuts, protecting EBITDA margins, which at 26% are ~2.5x the sector average and significantly above that of even next highest BorgWarner at 16%.
Gentex stands to benefit from pending legislation requiring backup camera protection, although the Street believes that the growth prospects are now more muted near-term by the potential placement of rear-camera displays in areas of the car other than the rear-view mirror. Its high European exposure presents risk, but not as much as commonly supposed given a solid intra-Europe customer mix and US dollar-denominated contracts.
Tenneco's aggressive expansion
Tenneco is a leading provider of emissions controls technologies and ride-control products for light and commercial-vehicle manufacturers and aftermarket customers. The global trend toward stronger regulation of vehicle tailpipe emissions provides Tenneco with one of the industry's best growth stories over the long run. This secular-growth theme has helped the company to overcome the general weakness in the European economy.
The Street is excited about Tenneco’s aggressive expansion into the commercial vehicle and off-highway market, which is expected to both accelerate revenue growth and prove accretive to margins. The Street forecasts significant long-term secular tailwinds, top-tier sales, earnings growth and above-average financial returns, presenting one of the most attractive investment opportunities amongst the automakers.
My Foolish take
A weak European economy and a high exposure to Europe doesn’t mean that a company might not be a growth story at all. Despite a weak economy in Europe, some companies might still be witnessing rising profits like secular-growth themes in Tenneco’s case, an ideal customer mix in Gentex’s case and/or diversifying into growing markets in BorgWarner’s case.
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Zain Abbas has no position in any stocks mentioned. The Motley Fool recommends BorgWarner and Gentex. The Motley Fool owns shares of Gentex. 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!