Auto Parts on Sale

 | May 24, 2012 | 2:30 PM EDT  | Comments
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Stock quotes in this article:

mpaa

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sup

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smp

Share prices in the auto parts industry have settled down a bit, due, in some measure, to the uptick in new-car sales over the past couple of years. New-car sales plunged during the recession and will likely never recover to pre-recession levels anytime soon. Since credit has eased up, however, financing a new vehicle has become simpler. Also, desperate to sell you a new car, automotive dealerships are stopping at nothing with respect to rebates and promotions.

Even as new-car sales improve, however, consumers are generally keeping cars longer, and when it's time to replace an automobile, many prefer to buy a newer used vehicle. In 2011 the average age of the U.S. automobile reached an all-time high of 10.8 years, up from 10.6 years in 2010 and following an upward trend that began in 1995 when the average age was 8.4 years.

At some point, that age will start to decline, but that likely won't happen in the foreseeable future. The strong growth in used-car sales continues to suggest that consumers are still being cautious with respect to spending. And with housing still weak, consumer spending will remain cautious with respect to big-ticket items.

Small-cap Motorcar Parts of America (MPAA) has seen its share price shrink to $5 from $15 in less than a year. Slow integration of a major acquisition has caused the numbers to look messy, but the company could earn over $1 per share in 2013. Motorcar Parts of America took on some meaningful debt in order to finance the deal, but debt servicing should be no problem -- thanks to stable cash flows and a recent rights offering that sold stock for $7.75 a share.

Superior Industries (SUP) makes aluminum wheels for car manufacturers, so it will also benefit from new-car manufacturing. Shares trade for $17, yield 4% and trade for 7x earnings. The company has a cash-rich balance sheet with no debt and over $7 a share in cash.

Standard Motor Products (SMP) manufactures replacement parts for automobiles. The company has minimal debt, trades for 5x earnings and yields 3%. Shares are off by over 50% in the past year.

The market seems to be anticipating a cyclical downturn in the auto parts industry and has been indiscriminate in the selloff. Patient investors not only have a chance to pick a quality yield but an opportunity for some exceptional returns from one of the most resilient sectors extant.

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