The Best Companies of the Auto Industry – October 2015

Best Companies of the Auto IndustryWhile ModernGraham supports the bottom-up approach to investing, many investors do utilize the top-down method, whereby an industry is selected before the company itself. With that in mind, this article will take a brief look at the best companies of the auto industry, selecting the most promising investment opportunities within the industry, and giving a broad look into the industry as a whole.

Out of the more than 560 companies reviewed by ModernGraham, 15 were identified as being closely related to the auto industry. Of those, only one is suitable for the Defensive Investor, four are suitable for the Enterprising Investor, and the remaining ten are considered speculative at this time. Excluding any extreme outliers, the average company was rated as being priced at 65.23% to its MG Value (estimated intrinsic value), with an average PEmg ratio of 21.13. The industry as a whole, therefore would appear to be undervalued, particularly in comparison to the market (see Mr. Market’s Mental State).

The Elite

The following companies have been rated as undervalued and suitable for either the Defensive Investor or the Enterprising Investor:

BorgWarner Inc. (BWA)

BorgWarner is not suitable for Defensive Investors but it does pass the initial requirements of the Enterprising Investor. The Defensive Investor is concerned with the insufficient earnings stability over the last ten years, the inconsistent dividend history, and the high PEmg and PB ratios, while the Enterprising Investor has no initial concerns. As a result, all Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to that valuation, it is critical to consider the company’s earnings history. In this case, it has grown its EPSmg (normalized earnings) from $1.24 in 2011 to an estimated $2.76 for 2015. This is a fairly strong level of demonstrated growth, and outpaces the market’s implied estimate for annual earnings growth of 4.91% over the next 7-10 years.

In recent years, the company’s actual growth in EPSmg has averaged nearly 25% annually, and while the ModernGraham valuation model reduces the actual growth to a more conservative figure when making an estimate, the model still returns an estimate of intrinsic value well above the current price, indicating that BorgWarner is significantly undervalued at the present time. (See the full valuation)

Ford Motor Company (F)

Ford Motor Company (F) qualifies for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings stability or growth over the last ten years and the inconsistent dividend record. The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.30 in 2011 to an estimated $1.59 for 2015. This level of demonstrated earnings growth outpaces the market’s implied estimate of 0.08% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price. (See the full valuation)

Harley-Davidson Inc (HOG)

Harley-Davidson Inc. qualifies for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings stability or growth over the last ten years, the low current ratio, and the high PB ratio. The Enterprising Investor is only initially concerned by the level of debt relative to the net current assets. As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.59 in 2011 to an estimated $3.49 for 2015. This level of demonstrated earnings growth outpaces the market’s implied estimate of 3.47% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price. (See the full valuation)

PACCAR Inc (PCAR)

Paccar Inc. qualifies for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient level of growth over the last ten years and the high PEmg ratio. The Enterprising Investor has no initial concerns. As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with the evaluation.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.94 in 2011 to an estimated $3.75 for 2015. This level of demonstrated earnings growth outpaces the market’s implied estimate of 4.48% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value well above the price. (See the full valuation)

The Good

The following companies have been rated as fairly valued and suitable for either the Defensive Investor or the Enterprising Investor:

Genuine Parts Company (GPC)

Genuine Parts Company qualifies for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio and the high PB ratio. The Enterprising Investor is only initially concerned by the low current ratio. As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $3.08 in 2011 to an estimated $4.43 for 2015. This level of demonstrated earnings growth supports the market’s implied estimate of 5.18% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value within a margin of safety relative to the price. (See the full valuation)

The Full List

 

To view the MG Value and PEmg information, you must be logged in as a premium member. Clicking on the company name will take you to the company’s latest valuation.

For the investor type, a “D” indicates the company is suitable for the Defensive Investor, an “E” indicates the company is suitable for the Enterprising Investor, and an “S” indicates the company is considered speculative at this time.

Ticker Name with Link Investor Type Latest Valuation Date MG Value Recent Price Price as a percent of Value PEmg Ratio Div. Yield
AAP Advance Auto Parts, Inc. S 8/4/2015 $191.94 0.13%
AN AutoNation, Inc. S 11/22/2014 $61.58 N/A
AZO AutoZone, Inc. S 1/4/2015 $762.24 N/A
BWA BorgWarner Inc. E 7/27/2015 $43.66 1.19%
DLPH Delphi Automotive PLC S 6/15/2015 $85.06 1.18%
F Ford Motor Company E 8/28/2015 $15.66 3.83%
GM