What are we looking for?
North American vehicle sales hit a record 18.33 million units in 2013, according to Scotiabank, while R.L. Polk & Co. found the average age of a North American car on the road also hit a high – of 11.4 years. My colleague Rob Belanger and I thought we would take a look at the booming auto parts sector.
We started with North American companies larger than $350-million in market capitalization and ranked them from largest to smallest.
Inventory turnover is an efficiency ratio and measures the number of times the inventory is sold and replaced during the fiscal year. We are looking for a high number.
Operating profit margin (OPM) is a measurement of what portion of a company’s revenue is left over after paying for variable costs such as wages and inventory. A high number is preferable.
Return on equity (ROE) measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested. A high number is ideal.
Return on invested capital (ROIC) shows a company’s efficiency at allocating its capital to profitable investments. It tells us how well a company is using its money to generate returns. We are looking for a high number, and only companies with positive ROIC are included.
Price to free cash flow (P/FCF) is an indicator of a company’s valuation. A low number may mean the stock is undervalued and only companies with positive free cash flow are included.
Enterprise value divided by earnings before interest, taxes, depreciation, and amortization (EV/EBITDA) is one of the most commonly used valuation metrics. We are looking for a low number.
Debt/EBITDA is the measure of a company’s ability to pay off its debt. We are again looking for a low number.
What did we find?
There are five companies that stand out. Magna International operates in 29 countries across five continents. BorgWarner is a global leader in power train technologies that improve fuel economy, emissions and performance. TRW Automotive manufactures automotive safety equipment. Lear Corp. specializes in seats and electrical components. Linamar produces precision products for powertrain systems.
Always conduct further research or contact an investment professional before investing.