Auto Industry Thrives Beyond Detroit

 | Aug 02, 2013 | 9:30 AM EDT
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Detroit, the city, just entered bankruptcy. A few short years ago, much of "Detroit," another name for the auto manufacturing industry, also entered bankruptcy. Yet, despite these upheavals, the American auto industry is doing quite well. General Motors (GM), Ford (F) and Chrysler (majority owned by Fiat, FIATY) have made surprisingly strong recoveries from the Great Recession when they, particularly GM and Chrysler, were near death. According to Bloomberg, industry sales are on a pace to be the best this year since 2007.

But the big, well-known automakers are not the only ones enjoying the fruits of the industry's revival. Firms related to the auto industry are also experiencing solid growth, including Asbury Automotive Group (ABG), which operates 98 auto franchises at 77 dealership locations in 10 states. It sells and services 29 brands of automobiles, with imports generating over 85% of sales. It has some competitive advantages including its size, track record of growth through acquisition and an emphasis on luxury and imported autos.

I choose stocks to write about based on ratings generating by my guru strategies. These are automated strategies I modeled from the writings of well-known investment gurus, and my James P. O'Shaughnessy strategy thinks Asbury could provide a smooth ride to investors. It likes the company's sizable market cap ($1.5 billion), earnings per share which have improved in each of the last five years, and a very favorable price-to-sales ratio. Companies that pass these three tests are then ranked by their relative strength, and the top 50 are chosen as worthy of buying. With a relative strength of 88, Asbury gets into this elite top-50 group.

Another auto-related company in this top 50 is Lithia Motors (LAD). Like Asbury, Lithia is an auto dealer. Its competitive advantage is being the only large publicly traded dealership primarily focused on rural markets. It operates in such towns as Medford, Ore., San Angelo, Texas, Anchorage, Alaska, Seaside, Calif., Helena, Mont., Ames, Iowa, and Reno, Nev. Its market cap is $1.7 billion, while its EPS have increased in each of the last five years and it has a very favorable price-to-sales ratio. It climbs into the top 50 cohort with a relative strength of 92.

Advance Auto Parts (AAP) gets a nod from my Warren Buffett-based strategy. Advance retails aftermarket auto parts from over 3,900 stores in 39 states, Puerto Rico and the Virgin Islands. It is one of the major players in this segment of the auto industry, and that is one reason the Buffett strategy likes Advance. The strategy looks for companies with sizable market positions like Advance's. Also in the company's favor is a history of EPS increasing in each of the past 10 years, high average return on equity (26.3% over the past 10 years) and high return on total capital (18.2% over the past decade). The strategy then projects what the investor's annual rate of return will be during the next 10 years if buying stock today, and Advance is expected to return a very desirable 16.2% a year.

The auto industry is huge and goes way beyond the traditional view of it being Detroit, and though most folks focus on the big, known carmakers, there is plenty of ancillary business for other types of companies. Asbury, Lithia and Advance are examples of companies within the larger auto industry that are doing well and provide excellent investment opportunities.

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