Carmakers’ recovery may benefit suppliers more

How fortunes vary. Motor City is bankrupt. But the motor industry, unveiling its hottest products at Detroit’s auto show last week, looks increasingly flush. China, now the world’s biggest auto market, posted stronger than expected growth for 2013 – a 14 per cent rise in light-vehicle sales, to 22m units.

Looking ahead, pollution controls are an issue. But rising consumer incomes and the potential for strong sales in smaller cities could make for double-digit growth again in 2014.

Europe, too, is finally on the turn – witness Friday’s December data. The 2014 bounceback may be modest, but LMC Automotive thinks light-vehicle sales will expand by about 3 per cent to 18.2m units. And, while the sales pace in the US is slowing, its cycle still has momentum left. A 4 per cent gain in 2014 would mean more than 16m light vehicles sold, within braking distance of 2007 levels.

Investors, though, need to weigh the merits of suppliers against those of carmakers. The former are not hugely more expensive: Bloomberg’s auto parts index is on a 2014 earnings multiple of 12.5, compared with 11 times for the auto sector overall. But parts makers are spared political sensitivities surrounding the big original equipment makers, making restructuring easier. And rising vehicle complexity is reducing suppliers’ cyclicality and improving growth potential.

Put the trends together, and what do you get? On the North American front, parts makers set to benefit from the European recovery include Delphi, Magna and Johnson Controls (all get roughly a third of sales from the region). Germany’s Continental, meanwhile, has the added advantage of a higher-margin tyre unit (40 per cent of sales), as well as chassis, power train and interior units. It is talking of a double-digit operating margin in 2014, having made 11 per cent in 2013. True, its shares, on a 13 times forward multiple have had a good run. But if raw material prices remain helpful on the tyre side, there may yet be more roads ahead.

Source: FT


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