The S&P 500 is expected to return around 10% for 2015 – year-to-date though, it’s only up 2.35%. Yields on bonds are slowly tracking higher in advance of the Fed interest rate hike, but still remain far below historical averages. Commodities haven’t fared well either with oil plunging in the past year and gold trading relatively flat. However, there’s no such thing as a market without opportunity.
The auto parts industry is growing at a tremendous rate – for one company, the 5-year expected EPS growth rate is over 20%. In April, I wrote about the opportunities in the auto industry for manufacturers. The auto parts segment is a great way to play off of that angle.
A significant tailwind for the industry is the fall in gas prices that we’ve seen over the last few months. While prices have begun to rise again, consumers have already been logging more miles in their vehicles since they can travel further for the same cost. Increased wear and tear on motor vehicles translates into high demand for auto parts.
Take a look at the research published by the Federal Reserve Bank of St. Louis. There’s been a sizable increase in the Moving 12-Month Total Vehicle Miles Traveled chart. According to the latest data, the average number has risen to an all-time high of 3,064,839 million miles. As the summer season approaches, we can expect that figure to continue climbing higher as well.
This stock offers both growth and value for investors
American Axle & Manufacturing Holdings (AXL) is a $2 billion auto parts manufacturer with operations in 13 different countries. The company recently surprised analysts with a strong earnings beat reporting earnings of $0.68 per share versus $0.57 that Wall Street anticipated. It’s an 18.5% upside surprise and could be indicative of where the stock is headed this year.
Year-to-date the stock is up nearly 12% and more than 36% in the past 12 months. Despite operating globally, the company recorded most of it’s earnings in domestic markets thereby reducing any negative effects that a strong dollar is having on foreign currency exchanges. The company reported net income for the first quarter of $53.2 million compared to just $33.6 million in the prior year first quarter.
Chart courtesy of StockCharts.com
This chart shows how the stock trended a bit lower during the month of April but is back on the rise. Based on it’s MACD, it also appears that upside momentum is building.
From a value perspective, American Axle has a lot of positive ratios investors should pay attention to. One of the most significant is also one the easiest to overlook – the price-to-forward sales ratio. The company has a ratio of 0.50 which means that investors are paying $0.50 for every dollar generated by American Axle. For the auto parts industry, that ratio is 0.67 meaning that investors can pick up this stock at a bargain price.
The stock is a screaming buy based on it’s PEG ratio as well. Forward price-to-earnings stands at 8.8 while the industry average is 12.4 and American Axle’s expected EPS growth this year is 20.6%. That gives the stock a PEG of less than 1 – an indicator that the stock may be trading at discounted levels.
Given a revised full year earnings estimate of $2.79 and a realistic P/E closer to the industry average, American Axle should be worth between $28 and $33 per share. That gives it a potential gain of 10% to 30% this year. If the company reports another major earnings beat, the stock should see a significant boost to its stock price as future guidance will need to be lifted.
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INO.com Contributor – Equities
Disclosure: This contributor does not own any stocks mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
Source: www.ino.com This Stock Is Best In Class In The High Growth Auto Parts Industry