Auto Stocks Will Keep on Rolling

 | Mar 28, 2013 | 3:00 PM EDT  | Comments
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ctb

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mga

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gm

My clients own more stocks in the auto industry than any other industry. The average car on U.S. roads is now more than 11 years old. That's why I foresee continuing demand for replacement parts, and also pent-up demand for new cars. Here are four auto-related stocks I own that I have also purchased for most of my clients.

Dorman Products (DORM), of Colmar, Pa., makes about 128,000 replacement auto parts. Many of these parts used to be available only through car dealers or junkyards.

Dorman's customers include AutoZone (AZO), Advance Auto Parts (AAP), NAPA Auto Parts, and O'Reilly Automotive. The company has been gaining market share, and has shown compound annual earnings growth of better than 27% the past five years.

When I first bought Dorman shares in 2010, they were cheap, selling for a single-digit multiple of earnings. Today they sell for close to 20x earnings, but I'm not yet ready to sell. The company has earned a profit in each of the past 10 years, remains highly profitable and is debt-free.

I have owned Cooper Tire & Rubber (CTB) of Findlay, Ohio, since last fall. The price of rubber and other materials that go into tires have come down a bit in the past year or so. With the company's raw-material costs down, revenue should be up -- especially with all those old cars on the road. Even though the stock was up 33% in the fourth quarter, Cooper shares still go for 8x earnings, so I think there is room for further gains.

I also expect new-car sales to be strong. And indeed, there is already some sign of a comeback in progress, with sales of new cars and trucks in the U.S. now running at a respectable 15-million-vehicle-a-year pace.

That should help Magna (MGA), a large Canadian auto-parts manufacturer based in Aurora, Ontario. Magna's customer list reads like a who's who of the worldwide auto industry. It includes General Motors, Ford (F), Daimler Crysler, Volkswagen, Honda (HMC) and Toyota (TM), among others.

Magna has a heavily unionized work force and has issues with labor and benefit costs. Partly for that reason, the stock is inexpensive. It sells for 10x earnings, 1.4x book value (corporate net worth per share) and 0.4x revenue. I have owned the shares personally and for clients since 2011.

Finally, and perhaps most controversially, I hold stock in General Motors (GM) -– which has often been derided as "Government Motors" since the federal government's bailout of the company during the financial crisis. It's true that having Uncle Sam as your biggest shareholder can involve a lot of red tape. But the U.S. government's stake is just under 22% and falling, so I think investors will soon be able to cross that off their list of worries.

Unlike Ford, GM is doing well at selling cars in China. And the stock seems attractively cheap to me, as it is trading at 9x earnings.

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