BALTIMORE (Stockpickr) -- In the first part of this series, I looked at an emerging perfect backdrop for shares of auto makers and their parts suppliers. Industry conditions are improving, shares are quite inexpensive, and rising cash flow set the stage for strong dividends and buybacks.

In that first column, we looked at Ford Motor ( F - Get Report) as a good company with an unloved stock. Shares of Ford have fallen more than 35% since early 2011 on concerns that near-tem profit growth will be elusive.

It's true. Ford earned around $1.50 a share in 2011 and will likely do the same in 2012. And analysts see profits rising only 15% in 2013 to around $1.70 to $1.75 a share, in large part because the troubles in Europe may create a profit drag.

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Yet the stars are aligning for a profit bulge when the current headwinds abate, and Ford may be poised to earn $2.50 a share by the middle of the decade. The current $12 share price seemingly ignores that possibility. More to the point, even at current profit levels before the profit surge begins, Ford is generating stunning amounts of cash, fattening up its balance sheet and setting the stage for a new and rising dividend along with share buybacks.

But it's not just Ford that has reason to exhale these days. So many other auto makers and their parts suppliers are also getting healthier by the day, even if their flagging share prices say otherwise. How unloved in this group? Consider that GM ( GM - Get Report) has $19 billion in net cash -- accounting for fully half of its market value. The company is so flush that it's unlikely to ever again see the financial implosion that took place in 2008 and 2009. Yet investors figure this $155 billion (in 2012 sales) business deserves an enterprise value of just $19 billion.

The fact that GM and Ford trade for 5.5 times, and 7 times projected 2013 profits, respectively, tells you how cheap they are.

The auto parts suppliers also offer up compelling values. Here are three of them. Be sure to also check out the first part of this series, " The Auto Industry Renaissance Is for Real."


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TRW ( TRW) is the rare auto parts supplier that managed to keep making money even when the industry tanked a few years ago. Credit goes to a management team that has focused on cutting-edge products that will always be in demand. Many know that TRW virtually pioneered the airbag industry, cementing its lead into other safety technologies such as collision avoidance systems.

What they may not know is that TRW is also a leading supplier of fuel injection systems. A key reason why so many cars now get more than 30 miles per gallon on the highway is due to extremely precise delivery of fuel into cylinders. TRW is continually advancing these systems to deliver more power with less fuel, which is why industry analysts think we'll see a lot of cars getting 50 miles per gallon on the highway in a few years.

As is the case with many industry stocks, TRW posted a hefty rebound after plunging in early 2009. Shares hit almost $60 in the summer of 2011, but are now back down below $45. Shares are quite inexpensive trading at less than seven times projected 2013 profits of $6.50 a share.

If auto industry volumes keep rising into 2015, as discussed in this first part of the series, TRW may be looking at EPS approaching $10.

TRW is one of the top holdings of Highbridge Capital Management, which owned nearly 3 million shares of the stock as of the most recently reported quarter. I also featured it last month in " 4 Undervalued Stocks in Clint Eastwood's Favorite Sector."

American Axle

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Some investors in auto stocks aim to focus on two variables right now: They want to avoid exposure to Europe, and they want to capitalize on an expected upturn in demand for light trucks here in the U.S. as homebuilding construction finally starts to rebuild after multi-decade lows. Construction workers have been mostly patching up their old trucks to conserve cash, and this upgrade cycle may be huge.

American Axle ( AXL - Get Report) not only has minimal exposure to the troubles in Europe, but it's a key supplier for GM and Chrysler in their large pick-up truck programs. Along with Ford's F-Series pickups, GM and Chrysler's trucks remain among the top-selling vehicles in North America.

Analysts expect American Axle's sales to rise almost 10% this year to around $2.8 billion, and on the heels of a newly-launched GM truck in 2013, anticipate sales rising nearly 15% in 2013 to around $3.2 billion. Meanwhile, shares trade for less than five times projected 2013 profits.

American Axle shows up on a list of Stocks in Bottoming Sectors Primed for a 2012 Bounce.

Magna International

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Magna International ( MGA - Get Report) 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.