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5 Cheap Stocks for an Auto Industry Renaissance

Magna International

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Magna International (MGA) is something of a hybrid between an auto parts supplier and a full-fledged auto maker. At some of its facilities, it can actually produce entire cars for other manufacturers when they need extra capacity. And whereas most other parts suppliers simply design products to meet the specifications of their big customers, Magna develops many of its own products and systems from scratch, which helps yield sustainably robust profit margins. The company is a leading supplier of transmissions, fuel delivery systems, and many other engine components.

Yet Magna has not always pleased investors. Some have suggested that the company is spread too thin, trying to operate in too many niches to help it reach its target of $30 billion in annual sales (which analysts expect to happen in 2013). Management has gotten the message, and aims to shed underperforming divisions in order to boost margins even more. Another near-term concern: the company's exposure to beleaguered European auto makers means sales are expected to be flat in 2012.

But over the next few years, as Magna exits the lowest-margin businesses, Europe gets incrementally healthier, and the company completes a current share buyback program, EPS could rise from an expected $5.25 in 2013 to roughly $7 by the middle of the decade. Shares have rallied from $35 to $45 in early 2012, thanks to a blowout quarter, but a growing North American auto industry and a stabilizing European auto industry over the next few years should help this stock surge past the recent 52-week high of $55.

Magna shows up on a list of 6 Stocks Driving the Economy in 2012.

Many other industry bargains can be found, and the rising tide in this industry should lift most boats. Investor sentiment towards these stocks has ebbed, but the long-term outlook remains brighter than ever.

To see these stocks in action, visit the 5 Cheap Stocks for an Auto Industry Renaissance. And to read part I of this series, check out "The Auto Industry Renaissance Is for Real."

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At the time of publication, author had no positions in stocks mentioned.

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