When it comes to investing in automotive stocks, the stuff under the hood is starting to look a lot more impressive than what's on the road. While shares in General Motors Co. nudged higher on Wednesday, auto parts stocks were cruising with far more impressive gains.
Magna International Inc. rose 5.2 per cent, and that followed a 7.6 per cent gain on Tuesday, bringing the stock to a record high. Johnson Controls Inc. and Linamar Corp. also showed impressive gains.
It's no coincidence that the moves come after the release of December U.S. auto sales figures on Tuesday, which were better than expected. On a seasonally adjusted annual rate, sales rose to 12.5 million. GM and Ford Motor Co. are talking up a good 2011 as well, with sales forecasts at the high end of most expectations.
"The auto companies have been able to reduce their cost structures substantially in 2009 and 2010," said Michael Willemse, an analyst at CIBC World Markets. "So as volumes come back, they should benefit from operating leverage."
Now, investors are shedding their skepticism and turning to one of the best ways to play an automotive turnaround. Auto parts companies may not be as, er, glamorous or well known as the actual car makers, but they have a far superior track record for producing big profits during good times.
They're benefiting from lower competition, given that the recession wiped out a number of auto parts companies, surrendering greater market share to the healthier survivors.
As well, auto parts companies struggled between 2004 and 2008, when car sales consistently failed to live up to the production forecasts from the manufacturers like Ford and GM. Now, though, the opposite trend is unfolding: Car sales are surpassing forecasts, driving auto parts companies' profit margins higher.
If auto parts companies in general are hitting a sweet spot, then Magna may be in the best position of all: It is one of the top names in the business, especially after its dramatic transformation over the past year.
The company has ended its dual-class share structure, making the stock far more palatable to some institutional investors. As well, founder Frank Stronach relinquished majority control of the company. And his daughter, Belinda, left her position as executive vice-chairman at the end of 2010.
"Perhaps investors are pleased to see the Stronach family further distancing themselves from the company," Mr. Willemse said.