Ride Along With This Auto Play

 | Feb 04, 2013 | 11:00 AM EST  | Comments
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It was a strong year for auto sales in 2012. The industry continues to rebound to an annual production rate of more than 15 million domestic vehicles after posting less than 10 million in sales at the nadir of the financial crisis. The first month of the new year shows this trend continuing. January sales rose 14% compared with the same period in 2012. Truck sales are accelerating significantly as the housing market continues to recovers and construction activity picks up.

I own two of the big three domestic automakers, General Motors (GM) and Ford (F), via a position in slightly out-of-the-money long-term call options. Both stocks are cheap, but I don't hold the equity directly as the absence of volatility makes the option premiums cheap. In addition, both companies have huge and poorly performing European operations that I am concerned could get much worse if we hit any kind of additional headwinds in the European debt crisis. Most of the auto-parts makers also have had nice runs over the last couple of months; though many of them, such as TRW Automotive Holdings (TRW), have approximately half their sales powered by Europe.

One company that I believe is well positioned for the long term to take advantage of booming domestic auto sales while providing diversification is Johnson Controls (JCI). Its stock is trading below where it was a year ago, even with a nice run along with the rest of the auto parts sector recently. Johnson Controls is a diversified manufacturer. Its three main product lines are automotive interiors, batteries and building management systems such as air conditioning.

Four reasons I like JCI at $31 a share:

  • Approximately 50% of JCI's revenues come from making automotive interiors. This has been growing market over the last few years as less of this work is done in-house at auto manufacturers and more of the work is going to contract manufacturers. It also gets just under 15% of revenues from batteries, and this business line is expanding in faster growing Asia.
  • The remaining 35% of sales comes from making, installing and servicing building management systems. This provides solid diversification and the company should benefit as construction continues to pick up and as making buildings more energy efficient continues to grow in importance. The company has a more than $5 billion backlog for building and servicing these systems.
  • The stock is cheap at 10x forward earnings and it pays a dividend of 2.4%.
  • Standard & Poor's has its highest rating, Strong Buy, on the shares and projects earnings will grow at an average rate of 18% over the next three years. The stock also sports a solid five-year projected PEG near 1 (1.04).

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