Like most other manufacturing industries, automobile production follows a cyclical pattern. As the markets are largely positive for buyers and car making companies in the United States, vendors to auto companies such as Autoliv Inc. (NYSE:ALV), Tenneco Inc (NYSE:TEN), and Visteon Corp (NYSE:VC) are also benefiting. Continued low interest rates will continue to fuel this boom in vehicle sales but the key for investors is to focus on companies which have limited exposure to Europe – a region that is witnessing contacting business.
Autoliv Inc. (NYSE:ALV) produces automotive safety systems and supplies to most global automakers. The company generates nearly 30 percent of its sales in Europe but North America and China together account for more than 50 percent. Both are in expansion mode offsetting the softness in Europe. In the latest quarter, Autoliv recorded a 24 percent jump in its net income to $125.1 million compared with $101.4 million in the same period a year ago. This caused investors to buy more of the stock as the performance was despite a 2 percent reduction in sales revenues to $2.14 billion. Operating income also increased 19 percent to $182.4 million during the period. The stock currently trades at a price earnings ratio of 15 and has broken out of the trading range by gaining over 10 percent during the week. While the stock currently trades near the top of its 52 week trading range, it still offers a dividend yield of 2.6 percent.
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Illinois based Tenneco Inc (NYSE:TEN) is a producer of emission control and ride control products. The stock gained 5 percent as positive impact of a strong market became apparent. For the quarter ended March 31, Tenneco reported a net income of $54 million, up 80 percent from $30 million in the corresponding quarter a year ago. Like Autoliv Inc. (NYSE:ALV), Tenneco also saw marginally lower revenues to $1.9 billion. The company attributed this decline to slow growth of light and commercial vehicle sales in Europe and lower commercial vehicle sales in North America although this was somewhat offset by increased light vehicle production in China. The company has also benefited from a recent business restructuring which allows greater integration across all its geographies. Overall, Tenneco is well positioned to build on its light and commercial vehicle success in the US and replicate the success in other parts of the world where strict regulations are creating new opportunities. Besides, the stock is very attractively priced at price earnings ratio of 8.4. Although a debt equity ratio of 4.8 indicates it has a highly leveraged capital structure, it seems to be working in favor of company currently.
Visteon presents opportunity
Visteon Corp (NYSE:VC), which is scheduled to report its quarterly earnings on May 9, presents an opportunity to play the trend. The company derived nearly 35 percent of its revenues in 2012 from Europe but this is on decline. Besides, the remaining 65 percent comes from growth markets in Asia and North America which are expected to more than make up for the losses in Europe where it is aggressively restructuring operations. Results in the December quarter were in line with these expectations which further lend credence to the view. The company is a former subsidiary of Ford and still counts the automaker as one of the largest clients. Since Ford is doing well, it is not much of a stretch to say that Visteon can also be expected to surprise the market. At a forward price earnings ratio of 12.6, the stock has enough room for further growth.
Overall, these stocks represent an efficient way how the European menace can be downplayed while still enjoying the benefits in North America and Asia.
