With the economy recovering, the automotive industry has continued to rev things up. A prime example: Auto parts manufacturer Johnson Controls (JCI) jumped over 8% last Wednesday after posting an earnings beat.
And taking a broader look, auto parts stocks as a whole have climbed over 30% year-to-date. Still, not all auto names will keep accelerating in the next 6 to 12 months.
Let’s take a look at two stocks to buy and two to sell in this very competitive industry.
Buy: Icahn Enterprises L.P.
Carl Icahn might be 77 years old, but he is busier today than he’s been at any point in his career — or at least it seems that way. In the past year, Icahn has been involved in skirmishes over Dell (DELL) and Herbalife (HLF), made a ton of money on Netflix (NFLX) and invested significant capital in both Chesapeake Energy (CHK) and Transocean (RIG).
Investors have liked it, sending Icahn Enterprises L.P. (IEP) up over 50% year-to-date.
While this is a diverse play (IEP has $26.3 billion in assets invested in eight different industries), it has its auto exposure. See, Icahn doesn’t just invest in public companies. In many cases, he buys majority control — as he has done with Federal-Mogul (FDML), a Michigan-based company that manufactures automotive powertrain products and other aftermarket vehicle component parts, and that just posted a second-quarter profits after losing money in the same quarter last year.
IEP also recently upped its annual distribution, giving it a yield of 5.5%. And say what you will about Carl Icahn: He’s no dummy. IEP is a buy.
Buy: Wabco Holdings
For those unfamiliar with Wabco Holdings (WBC), its history is intertwined with Wabtec Corp. (WAB). Both are successor companies of George Westinghouse, the great American inventor, and both stocks have performed exceptionally better than the S&P 500 over the last five years.
Wabtec focuses on railcars, subways and buses while Wabco specializes in commercial vehicles. Personally, I prefer Wabco because it’s an incredibly efficient business. Despite a 10% decline in global commercial vehicle production in the first three months of the year, Wabco managed to hold its decline to less than 1%.
Plus, the company still upped its full-year 2013 guidance for revenue and earnings. Heck, the high end of its new EPS range would make for 9% year-over-year growth, which is superb for the struggling commercial truck business.
Sitting at or near its 52-week high, my second buy recommendation might seem careless to some. However, I see its stock taking off in 2014 as commercial truck production recovers.
Sell: Advance Auto Parts
Over the past two months, Advance Auto Parts (AAP) — the retailer of aftermarket auto parts to both the do-it-yourself crowd and commercial garages — was downgraded by two analysts. Deutsche Bank (DB) cut its rating from “Buy” to “Hold” in mid-May as a result of slowing comparable store sales, and also lowered its target price from $97 to $78 — $4 lower than its current share price.
More recently, Morgan Stanley (MS) cut its rating from “Equalweight” to “Underweight” at the end of June. While I’ve been unable to find Morgan Stanley’s reasons for the cut, it most likely had to do with AAP underperforming its peers AutoZone (AZO) and O’Reilly Automotive (ORLY). The Virginia-based specialty retailer is losing market share to its two biggest competitors and its total return year-to-date is only 13% — considerably lower than AZO and ORLY.
Plus, with its 2013 guidance cut thanks to a weak start to the year, I just don’t see AAP mounting a charge any time soon. There are better options when it comes to auto parts.
Lastly, we have Gentex (GNTX), which has a total return so far in 2013 of 23% — below the industry average.
In an attempt to diversify beyond its auto-dimming mirrors, where it has an 88% market share, the company just announced that it is buying HomeLink for $700 million from Johnson Controls. HomeLink provides a wireless system for opening your garage, turning on your exterior house lights and so on. The deal is expected to add $150 million in sales while improving gross margins by as much as 150 basis points.
Long-term I think this will be a good acquisition for the company. However, in the short-term, it’s paying a lot (4.7 times sales) while adding at least $200 million in debt and eliminating its very healthy cash position. Gentex will have to integrate HomeLink flawlessly since it’s paid a big price for $150 million in revenue.
Gentex releases its Q2 earnings this Wednesday. If it stumbles like it did last quarter, I’d expect its stock to begin a healthy decline over the remainder of 2013. And regardless of the results, Gentex is my second sell recommendation.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.