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Car Sales to Keep Rising, But You Can Play Trend Without Auto Maker Stocks

Carla Fried

The virtuous cycle of rising stock market values is working its charms for the auto industry. Consumers eyeing higher 401(k) and brokerage statements seem to be in the mood to buy a car.

US Auto Sales Chart

After years of delayed spending on big-ticket items, the expectation is that auto sales growth is still in the early innings of the cyclical shift; sales growth is expected to keep rising through 2017.

And that’s just here. As with most everything these days, the real growth opportunity is from global markets, especially Asia. Polk estimates that car registrations in the Asia/Pacific region will rise 9% over the next two years. That in turn is expected to trigger expanded auto production. IHS Global Insights forecasts a 20% increase in light-vehicle production through 2016, with the bulk of that happening in emerging Asia economies and India.

Auto manufacturers – Ford (NYSE:F), General Motors (GM), Toyota (TM) -- are the obvious way to invest in this uptick. Another entry point is to focus on companies that sell parts to the major manufacturers. Rather than having to nail the winners among the auto manufacturers, investing in suppliers that serve all the major manufacturers gives you a more diversified way to invest in growing auto demand.

As explained in an earlier post, concentrated value fund Oakmark Select’s biggest stake is in TRW Automotive (TRW), and it was adding to that position in the fourth quarter. Using YChart Stock Screener to drill down into the Auto Parts industry (Under All Companies choose Sectors, then Consumer Cyclical, and then Auto Parts) turns up another global parts supplier positioned to serve the strong Asia demand.

Autoliv (ALV) is a leading global manufacturer of auto-safety systems including air bags and seat belts. Sales rose 4% in 2012. That needs some unpacking. Europe accounts for about one-third of sales -- down from 45% a decade ago -- and last year sales declined 7% there. Adjusting for currency changes the hit to sales was 14%. There’s no getting around the Euro drag that is expected to persist this year as well. But Asia, which accounts for another third of sales, is a powerful counterpoint. China sales increased 9.4% last year. Overall sales to Asian manufacturers now represent about 35% of sales, up from 20% a decade ago.

Autoliv isn’t expecting that expansion to stall out. It forecasts sales into its growth markets (China, India, Thailand, Indonesia) will rise more than 11% a year through 2015. A boost in car production is the main catalyst, but so too is the fact that cars manufactured in emerging economies currently tend to spend less per car on safety features. That spending is expected to increase as those markets (and the disposable incomes of its consumers) expands.

From a valuation standpoint, Autoliv’s 12.7 forward PE ratio sits below the 14 PE for the S&P 500. Still, TRW is the clearer pure-value play with a forward PE of less than 10. For income seekers though, TRW Automotive doesn’t pay out a dividend. Autoliv has a current 2.8% dividend yield.

Granted, as the chart below shows, in the highly cyclical auto industry, maintaining dividend growth is not exactly easy.

ALV Dividend Chart

Still, a current payout ratio below 40% amid a global pickup in auto manufacturing suggests Autoliv will not have to put the brakes on http://ycharts.com/analysis/story/ten_leading_dividendgrowth_stocks_we_screen_the_aristocrats over the next few years.

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 editor@ycharts.com.

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