Bill Nygren’s concentrated $3.6 billion Oakmark Select fund has been on a nice roll. Its 17% return for the past 12 months is two percentage points ahead of the S&P 500. The value portfolio’s 8.6% annualized return over the past five years holds a four percentage point advantage over the index.
Right now Nygren and his two new co-managers are betting big on TRW Automotive (TRW) the leading global supplier of car safety components -- airbags, brakes -- to the major auto manufacturers. The long-term focused fund started buying into TRW a little more than a year ago, and its stake now is at 6.7% of the fund’s assets, making it the top holding. Filings show the fund was still buying in the 4th quarter of 2012, adding 500,000 shares, to bring its total stake to 4 million shares.
While that price jump has pushed TRW’s valuation up, the stock still trades well below market multiples for both trailing PE ratio and forward PE ratio.
Those low valuations are a function of concerns about demand from North American and European automakers, which account for about 80% of TRW sales. But the Oakmark Select team is taking a more nuanced look at auto sales. TRW’s global sales of $16.4 billion in 2012 were essentially flat -- with Europe sluggishness negating a 17% pickup in U.S. sales. In a recent note to shareholders Nygren made it clear his focus is elsewhere.
“Many investors have been concerned that demand for auto parts would fall if the economy turned down again. However, we believe that investors are just starting to understand the importance of emerging markets for the automotive industry. Long term, that growth is likely to overwhelm the cyclical ups and downs of Europe and the United States.”
Indeed, over the past two years TRW’s sales to China alone have jumped more than 80% -- to $2.2 billion. That’s during a period when China’s economy was slowing down, not up. China accounted for more than 13% of TRW’s sales in 2012, up from 10% in 2011.
While Europe could remain a drag for some time, the U.S. is looking to be a longer term tailwind to complement emerging markets growth. As fears of another recession abate, consumers are increasingly opening up their wallets for big-ticket purchases.
A recent analyst report out of Bank of America Merrill Lynch characterized the U.S. car sales rebound as still being in the “early innings” of a trend not expected to peak until 2018.
Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at email@example.com.
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