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Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Want a Ride? TRW Auto Set to Zoom

Stocks in this article: TRW

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( MagicDiligence) -- It comes as no great surprise that investors would be wary about investing into the automotive sector: 2008-09 are fresh in people's minds, during which American automakers General Motors (GM) and Chrysler filed for bankruptcy, and Ford (F) barely survived. Auto suppliers such as Delphi and Lear (LEA) trudged into bankruptcy court. To put it simply, the industry was decimated by the "Great Recession."

Even in the best of times, this is a difficult business. Auto sales are highly correlated to the general economic cycle. Capital costs for production equipment are high. Labor disputes and rising commodity costs are ever-present dangers. Consumer tastes can change quickly, wreaking havoc on model design plans that take years to come to fruition. Tight credit markets make it difficult for many buyers (consumers and businesses) to finance new vehicle purchases. And, historically, both automakers and suppliers have carried poor balance sheets with large debt burdens, "living on the edge" in a very unpredictable industry.

Given this, we need a very attractive candidate in order to gain exposure to this sector. Fortunately, Magic Formula Investing has dug up one such stock in TRW Automotive (TRW).

TRW is one of the world's largest auto-industry suppliers. The firm's primary focus is on safety-related systems present in modern vehicles. These run the gamut from electronic steering to anti-lock brake systems to air bags to lane assist systems and everything in between. TRW supplies most of the major automakers. Its top four customers are Volkswagen Group (20% of sales), Ford (16%), Fiat/Chrysler (14%), and General Motors (12%).

I like TRW for several reasons. First and foremost, the firm has an attractive set of growth opportunities. Over 80% of sales come from developed economies in North America and Europe. These two geographies have suffered from 30-year-low vehicle volumes in the 2008 to 2009 period. While 2010 and now 2011 have been an improvement, volumes are still some of the lowest in the past 40 years. To illustrate this, consider just U.S. sales. From 1968-2008, average new vehicle sales in the U.S. were 14.3 million units. More recently, from 1998 to 2008, the average was 16.8 million. In contrast, 2009 sales were 10.6 million and 2010 11.8 million. Even 2011, a rebound year, is only showing volumes around 13 million -- about 23% below the 1998 to 2008 average.

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