Elon Musk has a way with the media. He tends to suck all the air out of the room, and because his combination of inventiveness, antics, showmanship, vision, and wealth sells copy, the news organizations are happy to let him.
But did you know that there are other automotive stocks beside Tesla? In fact, the automotive industry, including Tesla, couldn’t exist if it weren’t for a whole network of subsidiary and supplier companies feeding tools and parts to the major manufacturers. Some of those companies are pretty good investments in their own right.
We’ll use TipRanks data to look in to some the bigger names among them. You might not recognize them, but there’s a good chance that you’ve ridden with their products.
American Axle builds drivetrains – the various driveshafts and joints that transfer power from a car’s engine and transmission to the wheels. The company is headquartered, appropriately enough, in the Motor City – Detroit, Michigan. American Axle is a supplier for auto companies worldwide.
AXL is also the weakest of the stocks in this article. The company is profitable, but in an industry that is facing headwinds – from supply line disruptions to lower consumer spending to government regulation on manufacturing and fuel standards – AXL has its own set of difficulties. Auto manufacturers redesign cars necessitating new drivetrains, or they cut back on particular models, leaving AXL with a backlog of stock and no customer. Seasonal slowdowns in auto sales trickle back along the supply lines, leaving Axle’s factories idle some months or working double shifts others.
With all of that, Axle shows a remarkable resiliency. It has an underlying strength: its customers are auto manufacturers who absolutely cannot do without Axle’s products. AXL’s quarterly income shows the results of this. In Q2 of this year, Axle reported $151.1 million net, more than double Q1. That number dropped in Q3, reported just over a week ago, to $63.8 million. The numbers help make sense of AXL’s market performance, with the modest bump in early August and the sharp drop in early November.
It’s important to note that despite the Q3 income whiff, American Axle did not change the guidance on total 2018 sales. The company set $7.25 billion as the estimate, compared to the previous quarter’s $7.2 to $7.25 range. Axle does not expect the slow quarter to hurt in the long run.
The bottom line is, AXL stock is a risk investment – the average upside potential is 51%, but there is a downside potential as well. The analysts are divided on how to treat AXL, with some seeing room for appreciation, while others see this stock staying flat. Among the most recent analyst ratings on this stocks, Citigroup’s Itay Michaeli (Track Record & Ratings) takes the strongest view, upgrading AXL and setting a $19 price target.
The analyst consensus on AXL is a ‘Moderate Buy,’ with the average price target of $18 against the $12 share price giving a 50% upside potential.
As the name says, Allison builds transmissions for the auto companies. The company recently had a gangbuster third quarter, with a 50% increase in year-over-year net income, and a boost in sales that beat the consensus sales estimate. Company CEO Dave Grazoisi said in the Q3 earnings call, “We are very pleased to report that Allison achieved record net sales of $711 million in the second quarter of 2018. Net sales for the quarter increased 23% from the same period in 2017, driven by increased demand across all of our end markets and the execution of growth initiatives throughout our business.”
A look at the stock chart shows the influence of strong quarterly performance. Q3 gave ALSN a bump that got it over last month’s general market slump, while the equally strong Q2, reported at the end of July, is visible on the chart as a sharp rise. Like Axle, Allison’s underlying strength is building a product that its customers must have.
The analysts are less divided on ALSN than they are on AXL. In recent weeks, Jamie Cook (Track Record & Ratings) of Credit Suisse and David Leiker (Track Record & Ratings) of Baird have both upgraded their outlook and raised their price targets on this stock. Cook gives a target of $55, while Leiker set his at $52. Leiker has a particularly good record with ALSN, with an 88% success rate on his ratings and a 13% average return.
The analyst consensus on ALSN is a ‘Moderate Buy.’ The average price target of $53 represents a 15% upside from the share price of $46.
BorgWarner is a global supplier of transmission and powertrain components. The company is expanding into the growing electric vehicle market, especially in China. With increasing penetration of the Chinese market, BorgWarner has found itself facing headwinds from the Trump Administration’s tariff policy, while production cuts in the auto industry lead company execs to a cautious outlook on revenue growth.
At the same time, recent performance bodes well. BWA’s Q3 performance was excellent, with a 10% increase in net quarterly income, to $204 million, and a 3% gain in year-over-year revenue, to $2.5 billion. The company CEO, looking at 2018 as a whole, said that he expects BorgWarner “to outgrow the market” during the year.
BWA’s price performance has borne out the exec’s optimism. The price was stable for much of the last six months, dipping at the beginning of October along with the rest of the equity markets. The low point was reached on October 24 – the day before the Q3 earnings report came out. The earnings report prompted an immediate and significant rise.
Right after the Q3 report, Oppenheimer analyst Noah Kaye (Track Record & Ratings) set a $51 price target on BWA, saying that he expects he stock to recover. Echoing the CEO, Kaye added: “We remain confident in BWA’s ability to outgrow its end-markets by 500-600bps, given its product mix and leverage to more stringent emissions standards and electrification.”
BWA holds a ‘Strong Buy’ rating on the analyst consensus. Shares now stand at $39, so the $51 average price target gives a 30% upside potential.
Lear, the major supplier of seat components in the automotive industry, is in an odd place. The company has reported strong quarterly results, beating the estimates, but the stock price has been slipping. Like American Axle above, Lear appears to be a more risk-prone investment.
Lear’s Q2 results, in the summer, were good, with both record sales and quarterly net income. Q3 results showed a beat in the earnings per share but drops in quarterly income and revenue. The company still reported a net profit for the quarter. Lear lowered its 2018 total sales guidance by 3%.
The mixed Q3 results did not lead to a sell-off of LEA stock. In fact, looking at the chart, Lear saw a modest increase in share price at the end of October, as investors and analysts digested the news. Their overall assessment appears sanguine.
Citigroup, particularly, maintains a positive outlook on LEA, with Itay Michaeli (Track Record & Ratings) setting a bullish price target of $214 shortly before the Q3 report came out. RBC’s Joseph Spak (Track Record & Ratings) gave a target of $174 just after the quarterly earnings. Both analysts have positive records when reviewing this stock, with success rates of 64% and 71%.
The analyst consensus on Lear is a ‘Strong Buy,’ based on three recent buy ratings and no holds or sells. The average price target, $207, marks a 50% upside potential from the current share price of $138. In short, while LEA seems to pose some risk, analysts expect that it will regain the trading range it occupied earlier this year.
Author: Michael Marcus
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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