With cars becoming more complex and high-tech, the requirement for specialized components and parts is on the rise. This presents lucrative opportunities for companies within this industry to capitalize on, potentially leading to substantial profits.
Given the backdrop, buying the shares of two fundamentally sound auto part companies, Garrett Motion Inc. (GTX) and Ituran Location and Control Ltd. (ITRN), could be wise, as they appear to be strongly positioned to leverage the industry's favorable trends and significant profit opportunities.
On the other hand, considering the cyclical nature of the auto parts industry, it could be wise to steer clear of the fundamentally weak stock QuantumScape Corporation (QS).
The auto parts industry is poised for significant growth, primarily driven by the widespread adoption of technologies and increased research and development investments by manufacturers and associations. By 2026, the auto parts market is projected to reach a value of $755 billion, with an estimated CAGR of 7.5% between 2023 and 2032.
Moreover, the increasing demand for Electric Vehicles (EVs) is a significant driver of growth in the auto industry. In the U.S. market alone, the revenue from EV sales is expected to surge to around $70.13 billion by 2023, with a robust CAGR of 18.2% forecasted for the period between 2023 and 2028.
Further, the auto parts industry, a subset of the automotive industry, isn't solely reliant on car sales to drive revenue. Within this industry, there are companies that provide aftermarket maintenance services to improve the durability and longevity of vehicles.
In 2021, the revenue of the global automotive repair and service market was approximately $789.80 billion and was projected to experience substantial growth, reaching an estimated value of $1.53 trillion by 2030, exhibiting a CAGR of 7.6%
Considering the above statistics, the future of the auto market appears promising, offering substantial opportunities in the coming years. However, it is crucial to recognize that auto stocks are particularly sensitive to economic cycles. When economic conditions weaken, consumers tend to reduce their spending on major purchases, including automobiles, which can adversely affect the profitability of auto companies.
With all these factors in mind, let us look at the fundamentals of the featured stocks in detail:
Stocks to Buy:
Garrett Motion Inc. (GTX)
Headquartered in Rolle, Switzerland, GTX designs, manufactures, and sells turbocharger and electric-boosting technologies for light and commercial vehicle original equipment manufacturers worldwide. The company offers light vehicle gasoline and diesel, commercial vehicle turbochargers, as well as electrified vehicles.
On June 28, GTX celebrated the expansion of its Wuhan Plant in Hubei, China. The Wuhan facility's multi-phase expansion included the establishment of its first high-speed automated production line, specializing in advanced Variable Nozzle Technology (VNT) for turbo passenger vehicles.
This strategic investment resulted in a 50% increase in the plant's production capacity, driven by the growing demand for boosting technologies. These technologies enable engine downsizing and enhance fuel efficiency for Internal Combustion Engines (ICE) and electrified powertrains.
The stock’s trailing-12-month net income and levered FCF margins of 10.43% and 6.03% are 149.1% and 57.6% higher than the 4.19% and 3.82% industry averages, respectively. Likewise, its trailing-12-month ROTC of 29.42% is 378.5% higher than the industry average of 6.15%.
In the fiscal first quarter, which ended March 31, 2023, GTX’s net sales increased 7.7% year-over-year to $970 million, while its gross profit rose 8% from the year-ago value to $189 million.
During the same period, the company’s net income and EPS amounted to $41 million and $0.13, respectively. In addition, its adjusted EBITDA improved 13.4% from the prior-year quarter to $168 million.
The consensus revenue estimate of $982 million for the second quarter (ended June 30, 2023) represents a 14.3% improvement year-over-year. The consensus EPS estimate of $0.23 for the same quarter reflects a 52% increase year-over-year.
GTX’s shares have gained 24.8% over the past nine months to close the last trading session at $7.29.
GTX’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, which equates to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
It has an A grade for Growth and Value and a B for Quality. Within the A-rated Auto Parts industry, it is ranked #3 out of 60 stocks. Click here to see the other ratings of GTX for Momentum, Stability, and Sentiment.
Ituran Location and Control Ltd. (ITRN)
ITRN, headquartered in Azor, Israel, is engaged in providing location-based telematics services and machine-to-machine telematics products. It operates through two segments: Telematics Services and Telematics Products.
On June 5, ITRN revealed that its Brazilian subsidiary, Ituran Brazil, had entered into a partnership with Santander. By leveraging this collaboration with Santander, ITRN aims to offer its customers a comprehensive range of advantages, including reduced interest rates and access to telematic services for those who choose to install a vehicle tracker.
Furthermore, the program includes credit insurance, providing protection for financing and ensuring total or partial payment of the loan in the event of payment difficulties.
Its trailing-12-month EBITDA and net income margins of 26.78% and 13.22% are 200.3% and 557.5% higher than the industry averages of 2.01% and 6.97%, respectively. Likewise, its trailing-12-month ROCE of 26.87% is significantly higher than the industry average of 0.63%.
ITRN’s total revenue for the first quarter (ended March 31, 2023) increased 10.3% year-over-year to $79.47 million. Its operating income grew 8% from the year-ago value to $15.91 million.
The company’s net income for the period and EPS came in at $11.95 million and $0.56, up 28.6% and 30.2% for the prior-year quarter, respectively. Also, its gross profit rose 10.3% from the year-ago value to $36.69 million.
Streets expect its EPS for the second quarter (ended June 30, 2023) to improve 22.8% year-over-year to $0.53. It is further projected to increase by 15.5% per annum over the next five years. Additionally, it surpassed its revenue estimates in three of the trailing four quarters, which is promising.
The stock has gained 32.7% year-to-date to close the last trading session at $28.03.
It’s no surprise that ITRN has an overall rating of A, which equates to a Strong Buy in our proprietary rating system. It has an A grade for Quality and a B for Value, Stability, and Sentiment. Out of 60 stocks in the same industry, it is ranked #2.
In addition to the POWR Ratings we stated above, we also have ITRN’s ratings for Growth and Momentum. Get all ITRN ratings here.
Stock to Avoid:
QuantumScape Corporation (QS)
QS is a development stage company that primarily focuses on developing and commercializing solid-state lithium-metal batteries for electric vehicles and other applications.
QS’ trailing-12-month ROCE and ROTA of negative 30.53% and 30.20% compare with the industry averages of 9.84% and 3.64%. Likewise, its trailing-12-month cash per share of $0.54 is 77.5% lower than the industry average of $2.42.
For the first quarter that ended March 31, 2023, QS’ loss from operations rose 21.3% year-over-year to $109.98 million. The company’s net loss widened 15.8% and 14.3% from the year-ago values to $104.63 million and $0.24 per share, respectively. Also, its adjusted EBITDA loss came in at $62.48 million, widening 8.8% from the prior-year quarter.
Analysts expect QS’ loss per share for the second quarter (ended June 30, 2023) to be $0.19. Its EPS is expected to remain negative for the fiscal years 2023 and 2024. Moreover, it has a grim earnings surprise history, missing the EPS estimates in three of the trailing four quarters.
The stock has slumped 13.7% over the past year to close the last trading session at $9.36.
QS’ weak fundamentals are reflected in its POWR Ratings. It has an overall rating of F, equating to a Strong Sell in our proprietary rating system.
It has a D grade for Value, Stability, Sentiment, and Quality. Within the same industry, it is ranked last. Click here to see the other ratings of QS for Growth and Momentum.
What To Do Next?
Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:
GTX shares were trading at $7.34 per share on Wednesday afternoon, up $0.05 (+0.69%). Year-to-date, GTX has declined -3.67%, versus a 19.73% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Mukherjee
Anushka's ultimate aim is to equip investors with essential knowledge that empowers them to make well-informed investment choices and attain sustained financial prosperity in the long run.
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