Top Five Auto-Parts Stocks to Drive to Profit

Varied evidence of a global auto rebound has driven investors into auto-supplier stocks. Which stock will be the one for you?
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NEW YORK (TheStreet) -- Conflicting evidence of a global auto rebound, the volatility of raw material input costs, and differing opinions regarding the potential of double-dip recession have driven uncertainty in auto-supplier stocks. Which makes the auto-supplier stock you pick all the more crucial. Read on to learn more about the auto-supplier stocks that will be reporting soon...

WABCO

Earnings Date:

May 5 (before the market opens)

Consensus Estimate:

25 cents earnings per share

Fourth Quarter 2009 EPS:

36 cents earnings per share (24.1% outperformance of Street consensus of 29 cents)

Share Price Gain or Loss on Day of Last Earnings (Feb. 4):

-$2.13 (loss)

A decent first quarter should be expected of WABCO, as European heavy trucks, its biggest-end market, begin to recover, and inventory destocking at original equipment manufacturers comes to an end; but a decent quarter perhaps is just about all we should expect.

"This will be more of a confirmation quarter that things are coming together, but it doesn't strike me as one where there's a lot of earnings upside," KeyBanc Capital Markets analyst Jeffrey Hammond said.

WABCO's regional markets are currently showing mixed levels of robustness. Hammond said emerging markets are "off to races," citing the robust activity in Brazil and China; North America is building on a "nice foundation for sharp uptick into 2011;" and Europe is "stable at a bottom -- showing some signs of life, but still lagging a bit," pointing to the Eurozone debt crisis as an example.

"While industry data has been muted so far in 1Q, we still think production can be flattish sequentially," J.P. Morgan analyst Stephen Tusa wrote in an investor note.

Hammond adds that the pending decision on a European Union fine in connection with a price-fixing investigation, which the company inherited during its spin-off from American Standard in 2007 -- now referred to as Trane -- remains "a big overhang on the stock."

Cooper Tire & Rubber

Earnings Date:

May 5 (before the market opens)

Consensus Estimate:

14 cents earnings per share

Fourth Quarter 2009 EPS:

63 cents earnings per share (34% outperformance of Street consensus of 47 cents)

Share Price Gain or Loss on Day of Last Earnings (Mar. 2):

-28 cents (loss)

Analysts are expecting a strong first quarter for Cooper Tire & Rubber as customers start returning to the market for replacement tires after a sustained period of depressed tire purchases.

The ultimate question will be whether that growth is sustainable and whether Cooper Tire can successfully negotiate raw material appreciation going forward, said Morningstar analyst Joung Park. Prices of key tire production elements have been on the rise: rubber prices are at an all-time-high and steel and oil are both up.

"If raw materials continue to increase throughout 2010 it could become more difficult," Park cautioned. "Will price increases be enough to offset raw material price increases?"

Currently, the company is raising its tire prices more than many of its peers, but they're still being bought, given all that pent-up need for replacement tires, said BB&T Capital Markets analyst Anthony Cristello.

Cristello also believes that Cooper Tire has been "a big benefactor of Chinese tariffs," given its lower- price-point tires; it was announced last September that a three-year tariff would be issued on Chinese tire imports to stem their expansion amid union protests, starting at 35%, then dropping to 30% in the second year, and ending at 25% in the third year.

When the company's first quarter earnings come out, Cristello says he'll be paying attention to relative demand for Cooper Tire products, the company's sales volume figures, as well as its productivity and efficiencies since the closure of its Albany, Ga., facility last year.

"While the sale of CTB's auto parts business generated enough cash to retire merger-related debt, we expect the company to retain some debt, repurchase shares, and invest in the growth of the tire business," S&P analyst Efraim Levy wrote in a recent investor note.

ArvinMeritor

Earnings Date:

May 4 (before the market opens)

Consensus Estimate:

2 cents earnings per share

First Quarter 2010 EPS:

0 cents earnings per share (outperformance of Street consensus of -7 cents)

Share Price Gain or Loss on Day of Last Earnings (Feb. 2):

50 cents (gain)

While the long-term upside potential for ArvinMeritor continues to look promising, the stock looks like it may have run its course in the near-term.

"Our strong sell opinion reflects valuation following a long run up in the share price that began in May 2009. The shares recently traded at a below-peers multiple of sales," S&P analyst Efraim Levy noted. "At December 31, 2009, the company was in compliance with its debt covenants, and we forecast continuing compliance based on our industry and economic forecasts."

Risks to Levy's recommendation include the rising of the euro and other currencies against the dollar -- ArvinMeritor is a major player in Europe in the areas of independent truck drive axles and truck air brakes; a fall in raw-material costs for ArvinMeritor; the chance that commercial vehicle sales could exceed that of Levy's forecasts; and the chance that ArvinMeritor's cash flows may be aided by better performance at businesses that it hopes to put up for sale.

Overall, ArvinMeritor has been making significant progress in transforming itself to a supplier that caters mainly to the commercial vehicle end market, given that it now has only one more legacy light-vehicle-systems business to sell off. The business, its light-vehicle-body-systems operation, is now at a break-even level, after experiencing a period of cost-reduction measures, according to Morningstar analyst David Manger.

The company has made a "ton of progress, a 180-degree transformation," Manger said, while lauding ArvinMeritor's ability to lower the company's cost structure and its coming off trough levels. "They are exposed to the commercial vehicle market, which had three straight years of decline," and now they are coming off those declines, Manger said.

ArvinMeritor has been selling off pieces of its light vehicles businesses since the beginning of fiscal year 2007, and has suspended its dividends to save cash.

TRW Automotive

Earnings Date:

May 5 (before the market open)

Consensus Estimate:

73 cents earnings per share

Fourth Quarter 2009 EPS:

$1.40 cents earnings per share (86.7% outperformance of Street consensus of 75 cents)

Share Price Gain or Loss on Day of Last Earnings (Feb. 25):

$2.09 (gain)

TRW Automotive's high debt levels have been concerning, but as a key supplier of vehicle-safety products, the stock should benefit substantially with the pick-up of the auto market.

"Although we are concerned about above-average debt levels, we view TRW's participation in the favorable safety equipment market positively," S&P analyst Efraim Levy recently noted. He expects TRW to remain compliant with debt covenants.

The company's ability to beef up its balance sheet without significant margin contraction, given its "attractive niche" has also been noted by Morningstar analyst David Whiston. "Consumers in emerging markets are becoming wealthier and are slowly demanding more safety products in their vehicles," Whiston recently noted. Furthermore, Chinese and Indian automakers will require the best safety products in their vehicles in order to export their production to the U.S. and Europe; "thus, even if vehicle production declines, safety content per vehicle can still increase."

Still, he noted that bears say TRW "faces powerful customers that dictate price decreases as they compete for share in mature auto markets." Also concerning is volatile steel and other key raw-material prices. The "viability of some of the company's customers and key suppliers and the potential damage from a corporate failure at one or more of them," has also been of concern to Levy.

Magna International

Earnings Date:

May 6 (during market)

Consensus Estimate:

81 cents earnings per share

Fourth Quarter 2009 EPS:

-5 cents earnings per share (underperformance of Street consensus of 82 cents)

Share Price Gain or Loss on Day of Last Earnings (Feb. 25):

$2.22 (gain)

Citi analysts on April 21 raised their earnings estimate for Magna International's first quarter to 81 cents a share from 70 cents a share, which matches the average estimate from a Thomson Reuters survey of analysts, and reflects stronger-than-previously-expected production in North American and Europe. The analysts will be paying particular attention to Magna International's profit outlook for Europe this year, incremental margins in North America, raw material cost outlook -- steel in particular -- pace of takeover business and mergers & acquisitions updates during the company's upcoming first quarter earnings call.

Meanwhile, "Magna's European segment may actually surprise investors due to its exposure to the luxury car market, which we believe has not been materially impacted by the removal of the cash for clunkers program, and has benefited from an increase in exports," CIBC analyst Michael Willemse, wrote recently in an investor note. "The operating leverage to higher light vehicle sales in Europe for Magna is significant."

In its fourth quarter earnings release, Magna International said that severe industry conditions had provided opportunities for the company to strengthen its business relative to some of its competitors, with the company securing significant takeover business in 2009. Magna International said it had also completed the acquisitions of auto-supplier Cadence Innovation s.r.o, located primarily in the Czech Republic and several U.S. and Mexico facilities from Meridian Automotive Systems, who filed for Chapter 7 liquidation in Aug. 2009.

In other promising news, on April 26, Magna International announced that four of its operating units were awarded new business from Volkswagen Group of America, two of which will occupy space in the new supplier park Volkswagen is building adjacent to its Chattanooga, Tennessee, assembly facility.

The operating units and awarded content include Cosma International's body and structural components; Magna Closures' window regulators and decklid latches; Magna Exteriors and Interiors' fascias, sealing systems, and B & C pillar trim covers; and Magna Seating's complete seating systems.

-- Reported by Andrea Tse in New York

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