Value In Car Parts And Services

By Sham Gad | June 20, 2012 AAA

While the automotive industry is known for its cyclical ups and downs, the auto parts industry has been a very attractive industry for quite some time. It's almost like the razor-razor blade analogy; once a car is sold, it will need servicing for the rest of its life, which today can exceed 20 years, and the older a car gets, the more frequent are parts and service visits.

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Well Known Standouts
Almost everyone is familiar with the standouts in the industry, AutoZone (NYSE:AZO) and Advance Auto Parts (NYSE:AAP), but many smaller names remain ignored or dismissed. Carl Icahn's Federal-Mogul (Nasdaq:FDML) supplies power train and safety technologies worldwide; products include engine pistons, piston rings, brake pads and fuel pumps. Shares have fallen hard over the past several months, to $10 from about $20. The company has a market cap of over $1 billion, generates roughly $7 billion in annual revenue and over $600 million in EBITDA, or less than five times EV/EBITDA. Today, the company can be bought for around its book value.

Lesser Known Standouts
Superior Industries (NYSE:SUP) focuses on one car part: aluminum wheels. The majority of the company's business comes from General Motors (NYSE:GM), Ford (NYSE:F) and Chrysler, although the company also supplies parts to BMW and Nissan. The company has a market cap of over $440 million, no debt and a ton of cash on its balance sheet - nearly $200 million to be exact. That ensures that investors will continue to get nearly a 4% dividend yield currently being paid to investors.

Someone also has to do the repair work involving car parts. While many folks can handle the easy tasks, they often defer to repair shops. After falling some 30%, due to a failed buyout offer, Pep Boys (NYSE:PBY) at about $9 offers an attractive way to play an interesting business. Earnings are expected to accelerate over the next couple of years as the company realigns it business with a focus toward smaller, more profitable service centers.

SEE: The Industry Handbook: Automobiles

The Bottom Line
Cars have become essential assets for those that own them. During the housing crisis we saw more people default on mortgages than car payments. The need to maintain and repair them will remain a necessary expenditure in the eyes of consumers.

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

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