BorgWarner Inc. (BWA), Gentex Corporation (GNTX), Tenneco Inc (TEN): Automotive Suppliers – Performance Review, Part Two

This is the second part of my review of the recovering automotive suppliers industry. The companies within this industry are facing an era of changing demand. Products need to be replaced and redesigned due to stricter safety and environmental regulations.

Let’s review another three automotive suppliers are see how they are performing.

Strong performance despite Europe’s weak demand

BorgWarner Inc. (NYSE:BWA)BorgWarner Inc. (NYSE:BWA) is a global supplier of motor vehicle parts and systems, primarily for power-train applications.

The company reported net earnings of $1.22 per diluted share for the first-quarter, six cents down from last year. Net sales reached $1.85 billion, a 3% decrease compared with the first quarter of 2012. Despite the results, management has not changed its projections of annual sales growth between 2% and 6%.

BorgWarner Inc. (NYSE:BWA) is putting its focus on fuel economy and improved emissions products like DualTronic, a dual-clutch transmission system that gives a 15% increase in fuel efficiency. The company expects its demand to triple, reaching 8 million units by 2016. In addition, operational efficiency and cost controls enabled BorgWarner to raise its operating margin to 11.7%, despite the challenging sales environment. I strongly support these initiatives.

However, BorgWarner Inc. (NYSE:BWA)’s dependence on light-vehicle production in Europe, a market that comprises nearly half of its sales, more than offsets growth in other categories. Plus, strong competition in path-breaking categories and continuous pricing pressure limits profits.

A market-share king of a growing kingdom

Gentex Corporation (NASDAQ:GNTX) creates and produces electrochromic auto-dimming rear-view and side mirrors, and camera-based lighting-assist features for the global automotive industry.

The company’s net sales for the first quarter decreased 7% compared to prior-year’s quarter, driven primarily by annual customer price reductions. Gentex experienced an increased penetration of its auto-dimming mirrors which was offset by lower light vehicle production in Europe and Japan/Korea.

Gentex Corporation (NASDAQ:GNTX) has strong growth prospects for its mirrors, as 23% of current worldwide vehicle production includes interior auto-dimming mirrors. This percentage is expected to grow to 45% in 10 to 12 years, as some features will become standard. There are also prospects to bring Gentex’s technology to office and airplane windows over the long term. The company signed contracts to supply auto-dimming passenger windows for Boeing.

R&D investment is key for the company as it allows it to maintain competitive advantage. Having more than 700 patents worldwide, some valid through 2031, Gentex Corporation (NASDAQ:GNTX) has a dominant market share of 88%. This narrow economic moat should be able to protect the company for a long time. In addition, Gentex has a debt-free balance sheet and enough cash flow to allow the company to keep investing and growing.

This emission-control company is growing increasingly fast

Tenneco Inc (NYSE:TEN) is a producer of emission-control and ride-control products and systems for light, commercial and specialty-vehicle applications.

The company reported a 9.1% year-over-year increase in adjusted earnings for the first quarter of 2013. Net income grew 7.3% reaching $44 million. The main driver behind the growth is higher revenues from its Clean Air division.

Tenneco Inc (NYSE:TEN)’s emission-control segment will benefit through 2015, when tighter emission regulations take effect. Emission regulations that are being implemented globally will only help the company, accelerating its growth in its on-road and off-road commercial-vehicle markets. Management’s low-end expectation of 10% annualized revenue growth over the next five years shows confidence. In addition, the company’s diversification strategy has helped with significant business. Tenneco Inc (NYSE:TEN) aims to broaden its product portfolio and reach a dominant position through acquisitions and alliances. I support these initiatives.

However, high customer concentration and relatively weak demand for high-margin aftermarket parts puts a cap to the company’s results. Pricing pressure from original equipment manufacturers is always present in this industry, with automotive retailers consolidating and pushing for lower pricing. In addition, aftermarket demand is low as improved quality increased the useful life of parts.

Bottom line

BorgWarner Inc. (NYSE:BWA)’s efforts to control costs and its innovation in the fuel-economy field are encouraging. But competition and high dependence on Europe’s performance make it a stock to be avoided.

I am confident about the Gentex Corporation (NASDAQ:GNTX)’s future. The company has a leading product and prospects for expansion. It is a safe long-term investment.

Tenneco Inc (NYSE:TEN)’s business will expand along with emissions regulations, which are getting more and more strict. The company will maintain market share and increase its sales but its low pricing power and susceptibility to economic cycles make me stay away from its shares for now.

Vanina Egea has no position in any stocks mentioned. The Motley Fool recommends BorgWarner and Gentex. The Motley Fool owns shares of Gentex.

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