The auto industry is poised to maintain its resilience, given the technological advancements in the industry, in addition to the growing demand for Electric Vehicles (EVs).
Given this backdrop, let us look into some auto parts stocks, such as Gates Industrial Corporation plc (GTES), Modine Manufacturing Company (MOD), and Garrett Motion Inc. (GTX) now, which are currently trading at discounted valuations.
Like some other industries, myriad challenges, such as supply chain issues, geopolitical turmoil, chip scarcity, rising interest rates, and inflationary pressures, impacted the auto industry. However, the industry bounced back and is anticipated to thrive in the foreseeable future.
Despite record-high new-vehicle prices and rising interest rates, forecasters expect U.S. auto sales in May 2023 to witness a substantial increase of around 20% year-over-year, thanks to strong consumer demand and a bigger supply of new vehicles.
In addition, as per IEA’s latest projections, EV sales are expected to grow by another 35% in 2023 to reach 14 million, and such explosive growth means electric cars’ share of the overall car market has risen from around 4% in 2020 to 14% in 2022 and is poised to grow further to 18% in 2023.
As a result, a historic transformation of the car manufacturing industry worldwide is to be expected.
Moreover, many Americans are also opting for used vehicles or fixing their existing vehicles. As a result, consumers would rely on replacing automotive parts and completing regular car services to keep their vehicles in good shape.
The auto parts market is expected to be worth $755 billion by 2026. Additionally, between 2023 and 2032, it is projected to grow at a CAGR of 7.5%.
Given the industrial tailwinds and existing macroeconomic volatilities, investing in undervalued stocks of fundamentally resilient companies have been gaining prominence. Therefore, auto parts stocks GTES, MOD, and GTX, available at attractive valuations, could be solid portfolio additions now.
Gates Industrial Corporation plc (GTES)
GTES manufactures and sells engineered power transmission and fluid power solutions worldwide and operates in two segments, Power Transmission and Fluid Power. The company's products are used in applications across various markets, including industrial off-highway end markets and various industrial applications.
The company recently announced that its board of directors authorized a share repurchase program of up to $250 million, and the authorization will be valid through October 2024.
GTES’ forward EV/EBITDA of 7.63x is 28.5% lower than the 10.66x industry average. Its forward EV/EBIT and Price/Sales multiple of 12.15 and 0.89 are 18.3% and 29.9% lower than the industry averages of 14.87 and 1.27, respectively.
GTES’ trailing-12-month gross profit and EBIT margin of 35.79% and 12.19% are 19.9% and 25.7% higher than the 29.85% and 9.70% industry averages. Moreover, its trailing-12-month levered FCF margin of 10.04% is 92.7% higher than the industry average of 5.21%.
GTES’ net sales increased marginally year-over-year to $897.70 million for the first quarter (ended April 1, 2023). Its gross profit rose 6.6% over the prior-year quarter to $325.10 million.
Its adjusted EBITDA increased 11.3% over the prior-year quarter to $174.50 million. Its adjusted net income and adjusted net income per share came in at $72.80 million and $0.25, respectively.
Moreover, its free cash flow for the quarter stood at $37.90 million compared to a negative $123.40 million in the previous-year quarter. Also, its net cash provided by operating activities came in at $52.50 million, compared to net cash used in operating activities of $105.40 million in the year-ago quarter.
For fiscal 2023, the company expects its core revenue to grow between 1% and 5%, while its adjusted earnings per share is expected to come between $1.13 and $1.23. It also expects its free cash flow conversion to be approximately 100%, and the capital expenditure for the whole year is expected to be about $100 million.
GTES’ revenue and EPS for the quarter ending June 2023 are expected to increase 3.1% and 0.9% year-over-year to $935.18 million and $0.32, respectively. GTES’ stock has gained 8.5% year-to-date and 10% over the past six months to close the last trading session at $12.38.
GTES’ POWR Ratings reflect its promising outlook. It has an overall rating of A, equating to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
GTES has a B grade for Value, Stability, and Quality. It is ranked first within the A-rated 58-stock Auto Parts industry.
Click here to access the additional GTES’ ratings for Growth, Momentum, and Sentiment.
Modine Manufacturing Company (MOD)
MOD provides engineered heat transfer systems and heat transfer components for use in on and off-highway Original Equipment Manufacturer (OEM) vehicular applications. It operates through Climate Solutions and Performance Technologies segments.
MOD is expanding operations at its current location in Sremska, Serbia, to meet growing demand from the heat pump market in Europe. When completed later this year, the new facility will be a dedicated manufacturer of coils for commercial and residential heat pump applications. Such expansions should bode well for the company.
On April 25, MOD announced the launch of the EVantage Fuel Cell Stack Cooling Package (FC-SCP), purpose-built to meet the unique needs and low conductivity requirements of commercial fuel cell applications. As the demand for zero-emission vehicles soars, this new launch could fulfill the need for reliable and energy-efficient thermal management solutions.
In terms of forward EV/Sales, MOD is trading at 0.78x, 30.8% lower than the 1.13x industry average. Likewise, its forward EV/EBIT of 9.87x is 23.4% lower than the 12.89x industry average.
MOD’s trailing-12-month net income margin of 6.66% is 55.8% higher than the 4.28% industry average. Moreover, its trailing-12-month ROCE, ROTC, and ROTA of 29.34%, 10.08%, and 9.78% are 188.4%, 65.4%, and 168.4% higher than the industry averages of 10.18%, 6.10%, and 3.64%, respectively.
For the fiscal fourth quarter that ended March 31, 2023, MOD’s net sales increased 7.6% year-over-year to $618.10 million. The company’s gross profit increased 17.9% year-over-year to $112.20 million. Its adjusted EBITDA rose 15.5% year-over-year to $65.50 million.
The net earnings attributable to MOD came in at $89.90 million, up 970.2% year-over-year, while adjusted earnings per share came in at $0.67, up 17.5% from the year-ago quarter. MOD’s free cash flow for the quarter stood at $24.10 million, compared to a negative $5.5 million in the previous year’s quarter.
For the fiscal year 2024, the company expects its net sales to increase between 4% and 10%. Also, it expects its adjusted EBITDA to come between $240 million and $260 million, up 13% to 23%.
MOD’s revenue for the fiscal first quarter ending June 2023 is expected to increase 6.2% year-over-year to $574.67 million. Its EPS for the same quarter is expected to increase 38.5% year-over-year to $0.44. It surpassed its consensus EPS estimates in each of the trailing four quarters, which is impressive.
Over the past year, the stock has gained 153.2% to close the last trading session at $29.68. Over the past six months, it had gained 44.6%.
MOD’s POWR Ratings reflect this positive outlook. MOD has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
MOD has an A grade for Value and a B for Growth, Momentum, and Sentiment. Moreover, it is ranked #7 within the same industry.
Beyond what we have mentioned above, one can see the other ratings of MOD for Stability and Quality. Click here to see MOD’s ratings.
Garrett Motion Inc. (GTX)
GTX designs, manufactures, and sells turbochargers and electric-boosting technologies for light and commercial vehicle OEMs globally. The company provides light-vehicle gasoline, light-vehicle diesel, and commercial vehicle turbochargers; and automotive software solutions.
On April 13, GTX announced that it had entered into definitive agreements with Centerbridge Partners, L.P. and funds managed by Oaktree Capital Management, L.P. to simplify its capital structure by converting all outstanding Series A Preferred Stock into a single class of Common Stock on or about July 3, 2023. The Board authorized an increase in the general stock buyback program to $250 million.
The elimination of preferred stocks would result in over $100 million of incremental annual net cash flow to the business. The increase in annual cash flow would enhance its ability to invest in the future of its core turbo business and differentiated technologies for zero-emission mobility.
Furthermore, the company anticipates that this move will broaden and diversify its shareholder base and engage more effectively with the investment community.
GTX’s forward EV/Sales of 0.37x is 67.4% lower than the industry average of 1.13x. Likewise, the stock’s forward EV/EBITDA multiple of 2.32x is 75.4% lower than the industry average of 9.44x.
GTX’s trailing-12-month EBITDA and EBIT margin of 16.37% and 14.11% are 50.5% and 91.6% higher than the 10.88% and 7.36% industry averages. Moreover, its trailing-12-month levered FCF margin of 6.03% is 80.4% higher than the industry average of 3.34%.
For the first quarter that ended March 31, 2023, GTX’s net sales increased 7.7% year-over-year to $970 million, while its gross profit grew 8% from the prior-year quarter to $189 million. The company’s adjusted EBITDA rose 15.1% year-over-year to $168 million. Also, its adjusted free cash flow came in at $88 million, up 131.6% year-over-year.
The consensus revenue and EPS estimates of $982 million and $0.22 for the fiscal second quarter ending June 2023 reflect 14.3% and 47.3% year-over-year improvements, respectively.
Over the past year, the stock has gained 36%. Over the past six months, it has gained 7.6% to close the last trading session at $8.09.
It’s no surprise GTX has an overall A rating, equating to a Strong Buy in our proprietary rating system.
GTX has an A grade for Growth and Value and a B for Quality. Within the same industry, GTX is ranked #4.
Beyond what we have stated above, we’ve also rated GTX for Sentiment, Momentum, and Stability. Get all GTX ratings here.
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GTES shares were trading at $12.48 per share on Tuesday afternoon, up $0.10 (+0.81%). Year-to-date, GTES has gained 9.38%, versus a 12.13% rise in the benchmark S&P 500 index during the same period.
About the Author: Sristi Suman Jayaswal
The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.
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