It comes as no great surprise that investors would be wary about investing into the automotive sector. 2008-09 are fresh in people's minds, during which American automakers General Motors (GM) and Chrysler filed for bankruptcy, and Ford (F) barely survived. Auto suppliers such as Delphi and Lear (LEA) trudged into bankruptcy court. The industry, put simply, was decimated by the "Great Recession".
Even in the best of times, this is a difficult business. Auto sales are highly coorelated to the general economic cycle. Capital costs for production equipment are high. Labor disputes and rising commodity costs are ever-present dangers. Consumer tastes can change quickly, wreaking havoc on model design plans that take years to come to fruition. Tight credit markets make it difficult for many buyers (consumers and businesses) to finance new vehicle purchases. And, historically, both automakers and suppliers have carried poor balance sheets with large debt burdens, "living on the edge" in a very unpredictable industry.
Given this, we need a very attractive candidate in order to gain exposure to this sector. Fortunately, Magic Formula Investing (MFI) has dug up one such stock in TRW Automotive (TRW).
TRW is one of the world's largest auto suppliers. The firm's primary focus is on safety-related systems present in modern vehicles. These run the gamut from electronic steering to anti-lock brake systems to air bags to lane assist systems and everything in between. TRW supplies most of the major auto makers. Its top 4 customers are Volkswagen Group (20% of sales), Ford (16%), Fiat/Chrysler (14%), and General Motors (12%).
I like TRW for several reasons. First and foremost, the firm has an attractive set of growth opportunities. Over 80% of sales come from developed economies in North America and Europe. These two geographies have suffered from 30-year low vehicle volumes in the 2008-09 period. While 2010 and now 2011 have been an improvement, volumes are still some of the lowest in the past 40 years. To illustrate this, consider just U.S. sales. From 1968-2008, average new vehicle sales in the U.S. were 14.3 million units. More recently, from 1998-2008, the average was 16.8 million. In contrast, 2009 sales were 10.6 million and 2010 11.8 million. Even 2011, a rebound year, is only showing volumes around 13 million - about 23% below the '98-08 average. This also remains well below the scrappage rate of about 15 million units. A similar story exists for Europe.
Source: http://www.istockanalyst.com/finance/story/5488921/trw-automotive-is-set-to-steer-higher
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