Driverless cars may get the big headlines in the auto sector, but a half-dozen MoneyShow.com contributors see opportunity in more traditional areas of the industry -- cars, trucks, auto parts, RVs and used-car dealers.
John Buckingham, The Prudent Speculator
Auto and truck maker General Motors (GM) saw strong sales in the latest quarter, boosted by replacements for vehicles destroyed in the disastrous hurricanes in Florida and Texas.
GM posted earnings of $1.32 per share for the third quarter, 19% ahead of the analyst consensus. While SUVs and pickup trucks have been particularly popular of late for GM, the company remains focused on electric vehicles.
The Bolt EV gets over 230 miles on a charge in its current form and is available now and costs less than $40,000. It will inspire two new electric offerings by 2019.
While the competition is always fierce in the auto industry, we think that a solid balance sheet ($21 billion in cash and marketable securities), improving cost controls, healthy free cash flow and generous capital return initiatives make GM attractive. The stock now trades for roughly 6.9 times earnings and yields around 3.5%.
Elliott Gue, Capitalist Times
The U.S. auto market faces a tidal wave of cars coming off-lease during the next few years. Since 2010, new-car leases have gained popularity, reaching as much as one-third of all U.S. auto sales.
However, there's a hangover from all these leased vehicles; the soaring popularity of leases over the past three to five years spells a record number of off-lease vehicles entering the U.S. used-car market. The supply has pushed down used-car prices, and the increase in newer-model used cars competes with new cars for consumers' attention. Even worse, falling used-car prices impairs the economics of leasing over time.
This is bad news for companies exposed to the new-car market. But it represents a windfall for used-car retailer CarMax (KMX) , the largest used-car retailer in the U.S. and a pioneer of the no-haggle pricing model.
With used-car prices falling and a vast supply of relatively new, low mileage used vehicles coming off-lease over the next few years, CarMax should benefit. That's because many consumers will opt for a used vehicle rather than paying up for a new car under less attractive lease or financing terms.
Bears argue that CarMax will face headwinds as used-car prices fall. However, CarMax turns over its inventory rapidly. As a result, while the sticker prices of used cars CarMax sells decline in line with the used car market, so does the company's acquisition cost for buying new inventory.
As a result, the company has managed to keep the gross profit per unit sold constant over the past couple of years, even as used-car prices fell sharply. We are adding the stock to our Wealth Builder Portfolio.
Ned Piplovic, DividendInvestor
Penske Automotive Group (PAG) is an international transportation services company that operates automotive and commercial truck dealerships principally in the United States, Canada and Western Europe.
As of June 2017, the company operated more than 350 automotive retail franchises representing almost 50 global automotive brands and manufacturers. The company also operated 14 dealerships of heavy and medium duty trucks primarily under the Freightliner and Western Star brand names.
The company hiked its most recent quarterly dividend 3.1% from $0.32 to $0.33. The $1.32 annualized equivalent of the quarterly dividend distribution yields around 2.9%. This current yield is almost 46% higher than the company's 2% average yield over the past five years.
The company hiked its annual dividend at an average growth rate of 26% per year and quadrupled its total annual dividend over the past six consecutive years.
Over the past 12 years, the company skipped its quarterly dividend payout only once -- in the first quarter of 2011. The share price could continue its uptrend and support the company's dividend payouts in compensating shareholders with an improved rate of total returns.
Richard Moroney, Upside Stocks
Thor Industries (THO) , a leading maker of campers and motorhomes, is benefiting from moderate fuel prices and low financing rates. Robust demand, particularly from younger customers, has lifted shipments.
In 2016, industry shipments of recreational vehicles (RVs) jumped 15% to 430,691, the highest level in 40 years, according to the Recreational Vehicle Industry Association. In September, shipments surged a record 29%.
In the July quarter, Thor's per-share earnings were $2.26, up 44% and above the consensus of $1.95. Aided by acquisitions, revenue jumped 50% and topped expectations. Camper sales increased 47%, while motorhome sales surged 66%. The order backlog nearly doubled to $2.33 billion. Thor is rated a Best Buy.
We also see an opportunity in auto-parts supplier Stoneridge (SRI) , which seeks to grow two to three times faster than the automotive market over the next five years, is supplementing organic growth with acquisitions.
Capital expenditures climbed 27% in the first half of 2017, rebounding from a six-year low in 2016. Earlier this year, Stoneridge paid about $80 million for Orlaco Products, a leading supplier of vehicle cameras.
Stoneridge offered encouraging guidance for full-year 2017. Per-share earnings are expected to range from $1.48 to $1.54, versus the consensus of $1.46. Revenue should range from $810 million to $825 million, up at least 16%. Stoneridge is a Best Buy.
Lastly, Tower International (TOWR) offers decent growth at a lower valuation than most auto-parts suppliers. The company supplies body stampings, chassis parts and welded assemblies for passenger vehicles.
The shares surged on solid September-quarter results. Tower earned $0.85 per share excluding one-time items, down 6% year to year, but $0.09 above the consensus. Sales advanced 1% to $462 million, or 2% above the consensus.
For full-year 2017, management raised per-share-earnings guidance by $0.10 to $3.70, implying 10% growth. For 2018, the consensus is $3.98. The shares trade 21% below their five-year average P/E.
Should Tower return to the historical norm, the stock would trade at $41 based on the 2018 earnings estimate. Tower, with a 2018 P/E 40% below the median for S&P 1500 auto-parts makers, is being initiated as a Buy.
Mike Cintolo, Cabot Top Ten Trader
We like discovering off-the-beaten-path growth stories, and no stock fits that description better than Polaris Industries (PII) . The mid-cap company makes all-terrain vehicles (ATVs), utility vehicles, motorcycles and snowmobiles.
It's one of the oldest companies in the powersports business, with a deep stable of brands including the RZR Side by Side, Indian motorcycle, Switchback snowmobile, GEM passenger and utility vehicle, and Slingshot open-air roadster.
The stock recently scored a breakout when Polaris released a better-than-expected third-quarter report, showing 13% revenue growth and 192% EPS growth (to $1.46). With a greater focus on product innovation, and operational efficiencies kicking in, it looks like investors will continue to jump on Polaris.
Meanwhile, the latest earnings report at Dana Inc. (DAN) confirmed the company's recovery from a string of 10 consecutive quarters of declining revenue.
The company, which makes automotive components like axles, transmissions, suspensions, gaskets, driveshafts and the like, has factories around the world, including one that opened in China in 2013 and another in India in 2014. This year, the company has broken ground on a new gear factory in Europe.
Dana is an innovative company with a vault full of patents and a global reputation for quality. With an attractive P/E of 12 expected earnings, this looks like a good way to play the reviving strength of the global automotive industry.
Stephen Mauzy, Wyatt Research's Daily Profit
Ford Motor Co. (F) is the Rodney Dangerfield of U.S. automakers. It doesn't get any respect from investors. The shares have backfired and sputtered for most of 2017.
Ford is perceived as embodying more of the 20th Century than the 21st. The continual success of the F-150 truck series fuels the perception. The F-150 has been the best-selling vehicle in the United States for the past three decades.
Recent sales trends point to the streak going unchallenged for another decade. The latest quarterly numbers were respectable. Ford reported a 63% increase in net income. GAAP EPS of $0.39 easily breezed past consensus estimates for $0.33.
Ford should end 2017 better than it ended 2016. Management expects full-year EPS to post between $1.75 and $1.85. The consensus estimate had EPS pegged at $1.74 for the year. Either way, you're looking at a forward P/E multiple below 10x.
Investors perceive Ford as a technology laggard. On this front, perception comports with reality. But is that so wrong? Let someone else lose money developing electric and autonomous technology, and then pinch the technology if need be.
In the meantime, focus on selling what customers really want. In the United States, customers want heavyweight vehicles, such as trucks and SUVs.
Yes, perception might cause Ford's share price to lag. But as long as Ford continues to perfect what makes money, income investors can be assured that its dividend is built to last. That's reality.
What's built to last and offers 5% dividend yield is eventually worthy of investors' respect.