Betting on Strong Auto Sales

 | Feb 25, 2013 | 3:00 PM EST  | Comments
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gntx

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thrm

I guess you can call it somewhat official: the U.S. auto industry is back and it's growing. According to Edmunds.com, more than 1.2 million new vehicles were sold in February, a 4.3% increase over the same month last year and a whopping 15% increase over January. If t this estimate proves accurate, the seasonally adjusted annual rate of new autos sold would approximate 15.5 million in 2013. Such numbers, even if slightly on the optimistic side, are very strong for the auto industry. It's no coincidence that such strong growth in new auto sales comes alongside what appears to be a rebound in housing demand and prices.

It's not surprising then that shares in General Motors (GM) are trading near a 52-week high, though at $27 a share, I believe there remains quality upside. Even Ford (F), also near a 52-week high, looks attractive with a 3.2% yield for a quality blue-chip company. I believe there are now better ways to invest in strengthening U.S. auto market. Mr. Market, after all, is an anticipatory fellow and the rise in automaker share prices reflects the market's bullishness in future new-car demand.

Yet that bullishness has found its way over to names like Gentex (GNTX), the leading supplier of smart technology rearview mirrors to the global auto industry. New cars are all about latest bells and whistles -- GM just announced that many of its 2014 models will come with 4G WiFi access -- and Gentex stays ahead of curve when it comes to its technology. Most important, Gentex products offer enhanced safety measures, often the number-one selling point with most auto buyers. Trading at $19.25, shares are nearly half of what they fetched just over a year ago. The company has a pristine balance sheet with no debt and more than $400 million in cash against a market cap of $2.77 billion.

Gentherm (THRM) designs and manufactures heating and air systems for vehicles worldwide. The thesis is simple: more new cars means Gentherm can sell more products. Gentherm is small-cap with a valuation of $460 million, also with a solid balance sheet that consists of about $5 million in net debt. Analysts see earnings per share nearly doubling in 2013 to $0.88. Full-year 2012 results are due next week, with an EPS forecast for $0.47. Shares currently trade at about $15 and are valued at 30x earnings. The same multiple applied to 2013 earnings produces a share price of nearly $27, so even if the multiple compresses or EPS is slightly off, shares look quite attractive for the long run.

Names like Gentex and Gentherm typically see business growth after the auto industry experiences growth. As automakers grow confident about current and future auto-sales growth, parts orders pick up and drive top- and bottom-line growth for direct automaker suppliers. Both Gentex and Gentherm serve all major automakers and they are exposed to a strong tailwind from the general overall growth in the auto industry. Europe is probably the biggest anchor to the share price today, but at some point European car sales will start to grow again. So, problems in Europe today create future growth opportunity. Both companies possess attractive valuations, downside protection at current prices, and a high probability for future growth -- a wonderful recipe for capital preservation followed by capital appreciation.

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