3 Automotive Parts Makers Growing at Double-Digit Rates

Original Article:

Source: Link

Key Points As the automotive industry sets up for a potential comeback, three stocks could give investors double-digit EPS growth and upside through price targets. Being the first to get paid in the industry's value chain, these OEM names have analysts jumping all over them. Despite trading well below their 52-week lows, P/E ratios show markets are placing a premium quality on the future. The latest ISM manufacturing PMI index suggests that the turning point for the automotive stock sector is imminent. According to the report, a member of the primary metals industry was quoted as saying that "automotive builds continue at averages but not near maximum outputs." This could translate to there being a long runway for the industry to catch up. This sector is home to large household names like CarMax Inc. NYSE: KMX and Ford Motor NYSE: F. However, playing the value chain is often a better way to express a view for an industry, which is why original equipment manufacturers (OEMs) and other parts makers could be a more attractive growth strategy. Get alerts: Sign Up To ride this wave, investors could consider companies like Visteon Co. NASDAQ: VC, Driven Brands Holdings Inc. NASDAQ: DRVN, and LCI Industries NYSE: LCII as analysts are projecting double-digit earnings per share (EPS) growth. More Tailwinds Than Meet the Eye The U.S. economy is now at a diverging pivotal point propelled by the two most important sectors that drive gross domestic product (GDP) growth: services and manufacturing. According to the ISM Services PMI index, the services sector has been responsible for driving economic growth for over a year and a half, but that changes today. After contracting for nearly 18 months, the manufacturing sector expanded in March and then again in April. Analysts at Goldman Sachs think further — and sustained — expansion will follow in 2024. Because of this, the prices of steel and aluminum (the main components in OEMs) rose last month. Steel prices rallied from $3,330 to $3,600 in April alone, a near 10% increase that indicates growing demand for these commodities, likely spurred by automotive demand. With the Federal Reserve (the Fed) looking to cut rates this year, financing a new car could become more accessible for consumers, so these manufacturers are stocking up on the raw material needed to meet this potential future demand. 3 Stocks That Could Rally How can investors know if it’s not too late to enter this wave? Price action is a great place to start. Aside from price action, investors can gauge the market’s sentiment regarding EPS projections by comparing current forward P/E valuations against peers. Investors should look for a premium valuation, as stocks typically trade at more expensive multiples for a good reason. All three of these stocks trade below 80% of their 52-week high, which fits the Wall Street definition of a bear market: a 20% or more retracement from recent highs. Knowing this, analysts feel a lot more comfortable making bold predictions, as the upside gaps to be filled are more prominent now. 1. Visteon Visteon Today VC Visteon $116.12 +0.89 (+0.77%) 52-Week Range $105.19 ▼ $159.87 P/E Ratio 6.64 Price Target $142.36 Add to Watchlist Visteon analysts think the stock’s EPS could grow by 23.8% this year, above the automotive industry’s average expected 16%. Because of this projected outperformance, analysts at JPMorgan Chase decided to value the stock at $145 a share , or 25% higher than today’s prices. Visteon stock trades at a forward P/E ratio of 11x over the industry’s average valuation of 10x. While only a 10% premium, the market is still justifying the stock’s EPS growth projections and price targets. 2. Driven Brands Driven Brands Today DRVN Driven Brands $11.50 -0.50 (-4.17%) 52-Week Range $10.59 ▼ $28.83 Price Target $17.61 Add to Watchlist Driven Brands analysts see up to 30.7% EPS growth in the next 12 months, again beating the industry’s 16% average. Showing double-digit growth during an uncertain economic cycle, price targets reflect this added premium. Driven Brands could rally by 55.5% according to its $17.9 a share target Driven Brands becomes an outlier through its 12.5x valuation, bringing a 25% premium to boost future sentiment toward these projections and price targets. 3. LCI Industries LCI Industries Today LCII LCI Industries $104.99 -2.43 (-2.26%) 52-Week Range $102.39 ▼ $137.07 Dividend Yield 4.00% P/E Ratio 41.50 Price Target $104.20 Add to Watchlist LCI Industries will beat the industry again this year with its 26.6% EPS growth projections . Unlike its peers, today’s price targets actually reflect a single-digit downside. However, the stock’s 90% institutional ownership would give investors another leg to stand on. Among these institutional owners, Vanguard and PNC Financial Servicesdecided to boost their stakes in LCI by 0.4% and 2.1%, respectively, in the past quarter. Of these three stocks, the valuation leader is LCI Industries, whose 15x valuation calls for up to 50% premium to its peers. The Market’s Take Trading so low relative to their 52-week highs and still commanding premium valuations based on future projections, these stocks could fit the profile for investors looking for double-digit growth in one of the industries that may provide stability during uncertain economic times that could come for the second half of the year.