Auto parts stocks got a bounce with the rest of the market on Thursday as European leaders cut a deal to solve the critical Eurozone debt crisis. Auto suppliers Magna International (NYSE:MGA), Tenneco (NYSE:TEN) and American Axle (NYSE:AXL), rose by an average of 8% on Thursday. Most other auto parts stocks posted strong gains as well, driven in part by strong earnings from companies like Johnson Controls (NYSE:JCI) and Dana Holding (NYSE:DAN).
But despite all of this week’s rosy news, headwinds loom for the sector. The global economy remains weak, the devil is in the details of that Eurozone deal, flooding in Thailand has begun to disrupt vehicle production and even hot emerging auto markets like China and India are cooling off. As evidence of the broader concerns, Ford (NYSE:F) cut its profit forecast Wednesday on expectations of a weaker fourth quarter.
Even though optimism over a rebound in auto sales has been pushed valuations higher since late last year, there are still some stocks that are undervalued. And all things being more or less equal, auto supply stocks with dividends are an added bonus. So here are two stocks to drive for the dividends:
First is Magna International (NYSE:MGA). This diversified automotive supplier has a strong focus on emerging markets – particularly in China. Scotia Capital on Thursday initiated coverage with an “outperform” and a target price of $55. The company will announce quarterly earnings on Nov. 3. At about $40 now, MGA jumped 8.7% on Thursday and is trading nearly 30% above its 52-week low of $30.03 on Oct. 4. With a market cap of $9.8 billion, the stock has a price-to-earnings growth (PEG) ratio of 0.8, indicating that it is undervalued. Its balance sheet is solid with total cash of $1.7 billion and total debt of only about $150 million. The current dividend yield is 2.3% too, providing a good hedge against any declines in MGA stock.
Next is Johnson Controls (NYSE:JCI). In quarterly earnings released this week, JCI’s net profit and revenue increased by about 20%. The automotive seating, interior systems and battery supplier’s strengths include a presence in emerging markets like China and growth in the battery aftermarket. At about $33, JCI is trading more than 30% above its 52-week low of $24.29 on Oct. 4. With a market cap of $22.6 billion, JCI has a PEG ratio of 0.74, indicating that it is undervalued. The debt position could be better – total cash of $335 million compared to total debt of $5.2 billion. JCI has reliably paid its quarterly dividend for the past decade; current yield is 1.9%.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.
