Auto parts industry overview
The auto parts industry will continue to expand at a steady pace over the upcoming years. With a rising unemployment rate and tight credit markets, new vehicle sales witnessed a declivity of 14% in the previous six years. The growing average vehicle age coupled with the dropping scrappage rate drove the auto parts industry down during the financial contraction, as consumers opted to purchase parts and carry out the repair work themselves instead of buying new vehicles.
Deferred maintenance has been amplifying significantly in dollar terms from $62 million in FY09 to $68 million in FY12, which will further help auto parts companies register proliferating sales in the years to come.
I have opted for a key ratio comparison between the three major operators in the U.S. auto parts industry, which comprises of WABCO Holdings Inc. (NYSE:WBC), Magna International Inc. (NYSE:MGA) and Johnson Controls, Inc. (NYSE:JCI).
The auto parts industry grew revenue at a rate of 4.5% in the preceding three years when the U.S. economy was struggling through the economic downturn. However, the selected companies operating in the industry registered a double-digit growth in their top-line with Magna International Inc. (NYSE:MGA)’s revenue growth surpassing its peers, followed by WABCO Holdings Inc. (NYSE:WBC). Net margin also exhibited the same view, as Magna International Inc. (NYSE:MGA) exercised productivity and efficiency improvements at certain facilities and lower costs were incurred in preparation for upcoming launches.
Holistically, the key statistics of WABCO Holdings Inc. (NYSE:WBC) are depicting the company to be a cut above the industry and its competitors. To begin with, the operating margin of Wabco is the highest due to the cost management exercised in the area of selling and administrative expenses.
WABCO Holdings Inc. (NYSE:WBC) has been able to outclass its peers and the industry by a large margin in terms of profitability by posting ROE of 42.2%, which is quite higher when matched against its peers and is more than twofold the industry’s average, followed by Magna International Inc. (NYSE:MGA).
The returns of WABCO Holdings Inc. (NYSE:WBC) and Magna International Inc. (NYSE:MGA) look even more assuring when considering the fact that there is minimal financial risk, as the two companies have not taken on any long term debt whereas Johnson Controls, Inc. (NYSE:JCI) has debt/equity of 0.4, which is lower than industry’s ratio of 0.6.
The price/earnings to growth (PEG) ratio is used to determine a stock’s value while taking the company’s earnings growth into consideration, and is regarded to provide a more accurate picture than the P/E ratio. While a low P/E ratio may make a stock look like a good buy, factoring in the company’s growth rate to get the stock’s PEG ratio can tell a different story.The PEG ratio that indicates an over or underpriced stock varies by industry and by company type, though a broad rule of thumb is that a PEG ratio below one is desirable. As these companies are the fastest growing companies in a sector that I believe will thrive in the near future. Therefore, I have compared their respective PEG ratios. Both Wabco and Magna tend to pose attractive buy opportunities for investors, as exhibited by their PEG ratios, which are less than 1. The lower the PEG ratio, the more the stock may be undervalued given its earnings performance. Buying Johnson Controls, Inc. (NYSE:JCI) to achieve the benefits of its earnings growth rate can be slightly more expensive for investors with its PEG above 1.
Valuation Based on Comparable Approach
Multiple based valuation has been used to value each company mentioned in the above table. The valuation metrics, P/E (where P/E represents the price that the investor is paying for getting exposure to one dollar of earnings), P/S (where P/S represents the price that the investor is paying for getting exposure to one dollar of sales) and P/B (where P/B represents the price that the investor is paying for getting exposure to one dollar of book value), are identified for each company and averaged.