Samuel Oubadia is a senior analyst at Lorne Steinberg Wealth Management in Montreal.
What are we looking for?
Bargains in the automotive sector.
In spite of recent gains in the equity markets, one industry that seems to be stuck in neutral is the automobile sector. While auto producers and some automobile component producers typically trade at lower price multiples, for a number of them, their problems have been exacerbated by a recent wave of product recalls. At Lorne Steinberg Wealth Management, we set out to find companies in the sector that trade at lower valuations and that have not participated in the market's rally.
The screen
Using S&P Capital IQ, we screened for automobile manufacturers and their suppliers. We limited our search to companies in developed markets, and that have a market capitalization of more than $1.5-billion (U.S.). To screen on valuation, we limited our search to companies that have a trailing price-to-book ratio of less than two. We also only included companies with a debt-to-equity ratio of less than 1.2 (expressed in the table as a percentage). Finally, we were only interested in companies that have not seen any increase in their share price (or that have seen their share price decline) since the start of this year.
What we found
The results can be seen in the accompanying table and the list includes some of the world's largest automobile manufacturers. A couple of these companies have been in the headlines in recent months, but unfortunately, it has been for the wrong reasons. This includes General Motors Co., which is dealing with a constant barrage of negative news and associated product recalls. Honda Motor Co. Ltd. has had similar problems in 2014. In general, product recalls in the automobile industry are on the rise because of the increased use in outsourcing and the larger number of different parties involved in the supply chain.
Speaking of that supply chain, the list also includes a couple of the large suppliers to the auto industry, such as Denso and Bridgestone Corp. Interestingly, these two companies trade at slightly higher multiples than the car manufacturers, but they also have considerably lower debt-to-equity ratios. This may make them more appealing to some investors. However, unlike the large Japanese car manufacturers that have American depositary receipts trading on the New York Stock Exchange, it may be more difficult for local investors to gain access to Denso and Bridgestone.
Investors are advised to do their own research before purchasing any of the companies listed here.