Reports of the death of the auto industry have been greatly exaggerated.

American automakers are certainly still in trouble, but there is a wide world out there and people, especially Chinese people, continue to buy cars. If people are still buying cars, that means companies are still building cars. If companies are still building cars, that means there is still business out there for auto parts companies.

Back From the Dead
Investors are right to be skeptical of the thesis that there is actually money to be made from investing in auto parts stocks. After all, many of these companies had the same problems as the U.S. automakers - stagnant sales, competition from foreign companies, outdated (and excessive) cost structures and too much debt. More than a few companies went bankrupt or flirted with bankruptcy. (For more, see Analyzing Auto Stocks.)

That was then. This is now.

New Technologies, New Markets
If investors do want to give auto parts companies a chance, they would do well to focus on those companies that have the opportunity to leverage new technologies and/or new markets into greater growth.

IN PICTURES: 20 Tools For Building Up Your Portfolio

Autoliv (NYSE:ALV) has long been a pioneer in auto safety products, and the company holds roughly 40% of the still-new side impact airbag market. Consumers are not going to look for less safety in the future and it is a fair bet that Autoliv will see more and more demand from developing markets in Eastern Europe, China and India.

Gentex (Nasdaq:GNTX) is another parts supplier bringing new ideas to an old industry. Do you have an auto-dimming mirror? There is a better than 80% chance that it came from Gentex. On top of auto-dimming rear-view and side-view mirrors for cars, the company is also working with Boeing (NYSE:BA) to develop auto-dimming passenger windows for airplanes.

Of course, we cannot have a discussion about cars without mentioning China and its huge (and still growing) market. While building a share in China has to be a goal for nearly any auto parts company that wants to have a future, why not start by looking at some home-grown talent? SORL Auto Parts (Nasdaq:SORL) and Tongxin International (Nasdaq:TXIC) are both fast-growing companies that feed directly into the Chinese auto market, and SORL is already the largest brake supplier to the Chinese commercial vehicle industry.

The Tale of the Tape

Company EV / EBITDA ROIC Debt / Equity
Autoliv(NYSE:ALV) 5.4 5.3 0.37
ArvinMeritor(NYSE:ARM) 13.0 Neg Neg equity
American Axle(NYSE:AXL) 9.3 Neg Neg equity
Gentex(Nasdaq:GNTX) 12.8 13.2 0
SORL Auto Parts(Nasdaq:SORL) 8.2 16.0 0
Tenneco(NYSE:TEN) 5.7 0.3 Neg equity
Tongxin Intl(Nasdaq:TXIC) 4.6 5.2 .32

Keep On Trucking?
It is important to point out that many of these stocks have already had impressive runs, though in some cases these were rebounds off of lows that presupposed bankruptcy. That could mean that future gains are pressured by early investors looking to take profits. It is also worth noting that these are largely bets on growth and improvement in the sector - if the world economy slows again and/or these companies cannot grow and improve margins, a lot of the potential gains go away. Given that many of these companies still have high debt loads (if not negative equity), that is a risk that investors cannot ignore.

All of this said, I think investors can still make some money in this sector. Innovators like Gentex tend to do well no matter what industry they are in, and I believe an upcoming upgrade cycle in commercial trucks could be a boon to companies positioned in that space (like ArvinMeritor and Tenneco). As always, do your own due diligence and make sure you can afford to take the risks that go with this cyclical sector.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Will Virtusa Corporation's Stock Keep Chugging in 2016? (VRTU)

    Read a thorough review and analysis of Virtusa Corporation's stock looking to project how well the stock is likely to perform for investors in 2016.
  2. Stock Analysis

    Analyzing Porter's Five Forces on JPMorgan Chase (JPM)

    Examine the major money-center bank holding firm, JPMorgan Chase & Company, from the perspective of Porter's five forces model for industry analysis.
  3. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  4. Stock Analysis

    Analyzing Dish Network's Return on Equity (ROE) (DISH, TWC)

    Analyze Dish Network's return on equity (ROE), understand why it has vacillated so greatly in recent years and learn what factors are influencing it.
  5. Fundamental Analysis

    5 Must-Have Metrics For Value Investors

    Focusing on certain fundamental metrics is the best way for value investors to cash in gains. Here are the most important metrics to know.
  6. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  7. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  8. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  9. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  10. Stock Analysis

    The Top 5 Micro Cap Alternative Energy Stocks for 2016 (AMSC, SLTD)

    Follow a cautious approach when purchasing micro-cap stocks in the alternative energy sector. Learn about five alternative energy micro-caps worth considering.
RELATED FAQS
  1. When does a growth stock turn into a value opportunity?

    A growth stock turns into a value opportunity when it trades at a reasonable multiple of the company's earnings per share ... Read Full Answer >>
  2. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  3. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  4. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>
  5. How do you calculate working capital?

    Working capital represents the difference between a firm’s current assets and current liabilities. The challenge can be determining ... Read Full Answer >>
  6. What is the formula for calculating the current ratio?

    The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center