The automotive industry continues to recover at a rapid pace. The decline in the unemployment rate, coupled with low interest rates, have propelled automotive sales in the United States. Although a typical strategy to gain exposure to the automotive market is to invest in car manufacturers, a Foolish investor may also be interested in parts manufacturers. Auto parts companies should fare well as auto demand increases. The following three stocks may be bought as a basket to expose a portfolio to the automotive industry.
The automaker
From a fundamental analysis perspective, Ford Motor Company (NYSE:F) trades with a P/E ratio of 10.6, and a forward P/E of 9.45, while the industry’s P/E average is around 14. Ford Motor Company (NYSE:F) reported an outstanding first quarter as it increased net income to $1.6 billion, an increase of $215 million over last year. The Mustang sports car developer also saw a steep increase in units sold in North America, despite some weakness in international markets.
Regarding the future, Ford Motor Company (NYSE:F) is poised for more growth. The domestic market continues to strengthen and the Asian market is improving despite fierce competition from Honda Motor Co Ltd (ADR) (NYSE:HMC) and Toyota Motor Corporation (ADR) (NYSE:TM). Sales in European markets increased for the first time since 2011, which should boost revenue. Ford Motor Company (NYSE:F) also increased its sales by 14% in May, the best number for May since 2005.
A good year
Despite recent underperformance by The Goodyear Tire & Rubber Company (NASDAQ:GT)., the stock is ready for a rebound. Since auto sales are increasing, the demand for tires goes right along with it. The Goodyear Tire & Rubber Company (NASDAQ:GT) continues to be a top choice for the supply of tires to car manufacturers. North America makes up for 50% of its revenue per year, but one of the key drivers will be higher demand in emerging markets such as Latin America and Asia. Furthermore, revenues from Europe should start picking up as demand for autos strengthens.
From a fundamental perspective, the company’s margins have been steadily improving since 2010. The Goodyear Tire & Rubber Company (NASDAQ:GT) hopes to increase its North American margins to 5% from 3% over the next several years. The company’s P/E of 17.3 is below the industry average of 20.2. Although its sales fell 12% to $4.8 billion last quarter, its net income increased $37 million because of margin expansion.
Auto parts
The fundamentals look good as the company trades around an 11 P/E, while the industry average is 19.9. Its price to book ratio is also below the industry average. Further, revenue growth for the last 3 years is 21%, while the industry average is 4.5%. Its sales increased 9% to $8.5 billion for the first quarter of 2013. Its net income grew to $369 million, or $1.57 per share, from $343 million, or $1.46 per share year over year.
Management expects revenue in 2013 to range between $32 billion to $33.4 billion as a new emission standards boost demand for fuel efficient components. Moreover, since its presence in the domestic and European markets is strong, sales should move in unison with Ford. Magna International Inc. (USA) (NYSE:MGA) has a solid balance sheet, trades below the industry average in many financial metrics, and has catalysts for growth.
A foolish note
The automotive industry is improving. And these companies are excellent options to gain exposure to this market. Ford’s performance has been steadily increasing, and the car maker should gain market share in the European markets. As the demand for tires increase, The Goodyear Tire & Rubber Company (NASDAQ:GT) should see a push in revenue. Lastly, the demand for Magna International Inc. (USA) (NYSE:MGA)’s products should increase as companies like Ford boost auto production to meet rising global demand.
Robinson Roacho has no position in any stocks mentioned. The Motley Fool recommends Ford. The Motley Fool owns shares of Ford. Robinson is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article 3 Stocks to Invest in the Improving Auto Market originally appeared on Fool.com is written by Robinson Roacho.
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