It's amazing the difference a year makes. After surviving bankruptcies, bail-outs, soaring gasoline prices and plummeting demand, the automotive industry seems to be rising like a phoenix. With the economy finally starting to really grind forward, consumers have once again begun to open their wallets. Rising consumer confidence figures are helping to buoy the sector and several major automakers have finally seen sales rebound. For investors, the time may be right to bet on the automakers and continuing improving operating environment. (For related reading, see Analyzing Auto Stocks.)

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Running at Full Capacity
Things may be looking up for the U.S. auto industry. Improving economic conditions and rising consumer sentiment have helped pushed auto sales upwards. Both international and domestic demand is finally returning for major automakers, as the global economy seems to be moving in the right direction. In the U.S., light vehicle sales have risen at least 10% for two straight years, the first time since 1984.

Sales in the U.S. have actually grown at a faster rate than China (the world's biggest auto market), for the first time in 13 years. All of this increased demand is allowing auto manufacturers to run at full capacity. According to Bloomberg, automakers such as Ford (NYSE:F), General Motors (NYSE:GM) and Kia Motors have brought back third shifts and are now expecting to run at about 81% capacity in 2012. This is up from the 2009 low of around 49%. More than 15 plants around the country have added around 4,300 new jobs.


However, the real bullish news could be just down the road. Added production is expected to continue throughout the year as analysts estimate that auto deliveries may rise about 5.6% to 13.5 million vehicles. Sales hit a 27-year low of 10.4 million sales back in 2009. Longer term, researchers expect auto sales to rise by about 1 million units per year through 2015, when they reach about 16 million vehicles. That puts auto sales back to a "normal" range.

The U.S. saw peak sales of 17 million cars in 2005. There may be some credence to their predictions. The average age of a car in the U.S. last year was 11.1 years, while the average truck was 10.4 years old. Analysts estimate that those cars and trucks will soon need to be replaced.


Hitting the Car Lot
With conditions improving for the automotive industry, now may be a good time for investors to revisit the sector. Both the First Trust Nasdaq Global Auto Index (Nasdaq:CARZ) and Global X Auto ETF (ARCA:VROM) can provide a broad overview of the sector. However, both ETFs hardly have any assets under management or liquidity. A better bet may be the original equipment manufacturers that supply the major auto producers. Here are a few picks. (To learn more, read ETF Liquidity: Why It Matters.)

Providing axels, drive shafts and various other structural components to global automakers, Dana (NYSE:DAN) makes an interesting play. The company emerged from bankruptcy in 2008 and under CEO Roger Wood, which it took from rival BorgWarner (NYSE:BWA), has been focusing on restructuring and operating margins. The company now offers a better pricing strategy and trades at discount to its peers. Shares of Dana trade for forward P/E of roughly 8.4. Likewise American Axle (NYSE:AXL) can currently be had for forward P/E of around 5.3 and recently beat Wall Street's estimates for earnings.

For investors looking for more a-dividend-play from OEM sector, Canadian firm Magna International (NYSE:MGA) offers about a 2.30% yield. Currently the firm has about $5.60 per share in cash on its books and roughly zero debt. Although, Johnson Controls (NYSE:JCI) has been moving into other areas of energy efficiency and building management, the company is still a leading auto parts producer. Any bump in auto sales will help boost the company's gains in these other growth businesses. Shares of Johnson controls also yield around 2.2%.

The Bottom Line
After bottoming out in 2009, the U.S. auto industry seems to be making a major comeback. Both international and domestic demand is rising and plants are running at near capacity. For investors, this could finally be the catalyst needed for investment. The previous firms, along with Federal-Mogul (Nasdaq:FDML), make ideal selections. (For additional reading, see The Industry Handbook: Automobiles.)

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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.


Tickers in this Article: F, GM, CARZ, VROM, DAN, BWA, AXL, MGA, JCI, FDML

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