Auto Industry

  • 16 Aug
    BWA is worth a very long look

    BWA is worth a very long look

    The market has been a bit shaky this week, as concerns about emerging markets and decreasing oil demand have put investors on edge, even as U.S. economic data and earnings information continues to come in strong and healthy. The market has dropped in five of the last six days after testing the all-time high levels all three major indices set in late January of this year. Trade tensions continue to add to that sense of uncertainty. While a smart investor won’t automatically dismiss the week’s decline as just another pullback, he also won’t ignore some of the opportunities that are coming about as a result.

    The automotive industry has been coming under quite a bit of pressure, with all “Big Three” automakers down for the year, as rising oil prices have increased costs and narrowed margins, and trade tensions and tariffs on steel, aluminum and autos themselves have added to the uncertainty about the industry. That volatility has rippled to the Auto Components industry as well, with stocks like Magna International (MGA), Lear Corporation (LEA), and Borg Warner Inc. (BWA) have all reversed impressive upward trends since the beginning of the year. BWA in particular is very interesting; as of this writing, it is down about 24% since early January of this year, but has begun to show signs of consolidation in the $44 to $46 price area. Could the time be right to think about this stock as a legitimate value play? There are some very compelling reasons to believe the answer is yes.



    Fundamental and Value Profile

    BorgWarner Inc. is engaged in providing technology solutions for combustion, hybrid and electric vehicles. The Company’s segments include Engine and Drivetrain. The Engine segment’s products include turbochargers, timing devices and chains, emissions systems and thermal systems. The Engine segment develops and manufactures products for gasoline and diesel engines, and alternative powertrains. The Drivetrain segment’s products include transmission components and systems, all-wheel drive (AWD) torque transfer systems and rotating electrical devices. The Company’s products are manufactured and sold across the world, primarily to original equipment manufacturers (OEMs) of light vehicles (passenger cars, sport-utility vehicles (SUVs), vans and light trucks). The Company’s products are also sold to other OEMs of commercial vehicles (medium-duty trucks, heavy-duty trucks and buses) and off-highway vehicles (agricultural and construction machinery and marine applications. BWA has a current market cap of about $9.2 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings increased almost 23%, while revenues increased nearly 13%. Growing earnings faster than sales is hard to do, and generally not sustainable in the long-term; however it is also a positive mark of management’s ability to maximize business operations. The company’s margin profile shows that Net Income as a percentage of Revenues improved from a little over 5% over the last twelve months to 10% in the last quarter.
    • Free Cash Flow: BWA’s free cash flow is adequate, at $515.9 million. This number has improved significantly since the last quarter of 2015, when it dropped below $150 million, however it has also declined in each of the last two quarters from a high at the end of 2017 at about $620 million.
    • Debt to Equity: A has a debt/equity ratio of .52. This is a very manageable number, however it is also worth noting that the company has a little over $2.1 billion in debt versus a little over $361 million in cash and liquid assets as of the last quarter. The company’s balance sheet indicates their operating profits are more than adequate to service the debt they have.
    • Dividend: BWA’s annual divided is $.68 per share and translates to a yield of 1.54% at the stock’s current price.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for BWA is $19.41 and translates to a Price/Book ratio of 2.26 at the stock’s current price. Their historical average Price/Book ratio is 2.96, suggesting suggests the stock is currently trading at a significant discount of about 30%. That is supported by the stock Price/Cash Flow ratio, which is currently about 50% below its average. Together, these providing a very compelling reason to take this stock seriously, with a long-term price of between $57 and $66 per share. That means the stock has some very good fundamental reasons to drive back to the 52-week highs it set at the beginning of the year, and even to possibly test its all-time highs, which were reached in 2014 at around $67 per share.



    Technical Profile

    Here’s a look at the stock’s latest technical chart.

     

    • Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s longer-term upward trend, and also informs the Fibonacci trend retracement lines shown on the right side of the chart. Since hitting its 52-week high at around $58, the stock has followed a significant downward trend that is on the verge of extending into a long-term period of time. Note, however that since the beginning of July the stock has consistently hovered between trend support around $43 and short-term resistance around $46 per share. Compared against the downward trend, that sideways pattern is called consolidation, and it suggests the stock could be building momentum to stage a significant reversal of that longer trend. A move above that top-end resistance could be taken as confirmation a new upward trend is about the start.
    • Near-term Keys: The stock is currently at the low end of its consolidation range. A move above $46 would be a very good signal to act on for a bullish trade, either by buying the stock outright or by working with call options. If the stock breaks below support at around $43, however, the current downward trend would be reconfirmed, with the stock likely to drop down to its next support level, which from historical pivots would probably be between $38 and $40 per share. That could provide an opportunity to short the stock or to start buying put options.


  • 31 Jul
    GT is up almost 14% in two days – you’d be silly to miss this opportunity

    GT is up almost 14% in two days – you’d be silly to miss this opportunity

    The longer a bull market lasts, the more people tend to think that looking for value in a stock’s price doesn’t really matter. Instead, they point to growth strategies, putting particular emphasis on growth estimates and forecasts. Forecasts usually come from a company’s management as a part of the conference calls they host to discuss their latest earnings results. They’ll provide some estimates for how much they think their business is likely to grow over the next quarter, next year, or sometimes more. Estimates come from analysts that follow those companies, and while they usually refer to management’s forecasts, they often seem to use other kinds of fuzzy math to come up with future growth numbers that really amount to nothing more than their own guesses. The ironic thing in my mind is that talking heads and other experts use these “estimates” to justify their cases for buying stocks at or near all-time highs. It doesn’t matter how high a stock has risen in the past, as long as people think it is going to keep going up.

    If that rationale seems a little silly to you, then you’re probably somebody that likes to go bargain hunting. When I talk about value investing with people, I often compare it to the kind of bargain shopping my wife likes to do at department stores. She spends a lot of time at clearance racks and likes to visit discount stores. She usually has to spend more time digging through things to find an item she likes, but she’s really good at finding nice things without having to pay full price for them. Value investing really isn’t all that different from bargain hunting, because you have to spend some time digging through lots of stocks to find something useful. Over the last few days, I’ve noticed that some of those talking heads that have been beating the growth drum forever seem to be shifting their discussions now to talks about value. That could be part of the reason that stocks like Goodyear Tire & Rubber (GT), which haven’t just underperformed the stock market but have been in steep, protracted downward trends are showing some signs of life right now.

    GT’s fundamentals are solid despite its price decline, which dates back to late January of this year and, which I think can be attributed mostly to broader concerns about the economy and trade tensions – I believe the stock has suffered a sympathetic response to the Trump administration’s steel and aluminum tariffs against the E.U., as well as auto tariffs against Canada and Mexico. The company recently released their latest earnings report, however and things look good, and the value proposition is very compelling.



    Fundamental and Value Profile

    The Goodyear Tire & Rubber Company is a manufacturer of tires. The Company operates through three segments. The Americas segment develops, manufactures, distributes and sells tires and related products and services in North, Central and South America, and sells tires to various export markets. The Americas segment manufactures and sells tires for automobiles, trucks, buses, earthmoving, mining and industrial equipment, aircraft and for various other applications. The Europe, the Middle East and Africa (EMEA) segment develops, manufactures, distributes and sells tires for automobiles, trucks, buses, aircraft, motorcycles, and earthmoving, mining and industrial equipment throughout EMEA under the Goodyear, Dunlop, Debica, Sava and Fulda brands. The Asia Pacific segment develops, manufactures, distributes and sells tires for automobiles, trucks, aircraft, farm, and earthmoving, mining and industrial equipment throughout the Asia Pacific region, and sells tires to various export markets. GT has a market cap of $5.7 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings declined by about 11%, while sales increased at a modest rate of a little more than 4%. The story is better in the most recent quarter, as GT saw an earnings improvement of 24% against flat sales. The company operates with narrow margins, as Net Income was about 1.5% of Revenues for the last twelve months. The improvement in earnings for the quarter is also reflected by an improvement in the Net Income/Revenue metric for the period, which increased to a little over 4%.
    • Free Cash Flow: GT’s free cash flow is healthy, at about $445 million. That translates to a free cash flow yield of a little less than 10%, but remains adequate.
    • Debt to Equity: GT has a debt/equity ratio of 1.18. This is higher than I prefer to see, and has increased in each of the last two quarters, indicating that GT has been taking on more debt. Over the last two quarters, the company’s long-term debt increased from around $5.1 billion to a little more than $5.7 billion. That is a red flag, however the company’s balance sheet indicates that operating profits remain healthy and more than adequate to service their debt.
    • Dividend: GT pays an annual dividend of $.56 per share, which translates to a yield of about 2.3% at the stock’s current price. This is above the industry average as well as the S&P 500 average of 2.0%.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for GT is $20.20 and translates to a Price/Book ratio of 1.19. The industry average is 1.9, and the stock’s historical average is 2.375. A rally to par with the historical average would put the stock above $47 per share. The truth is that the stock hasn’t been above $36 in almost 20 years, and so some might discount this as a useful long-term target price. I disagree with that notion, because the truth is that while the auto industry is changing and evolving with new technologies like electric and self-driving vehicles, the need for tires isn’t going to go away, or to be disrupted in a significant way. Even if you use the stock’s 20-year peak at $36 as a target price, that is still a great long-term opportunity for a stock that is just a little above $24 right now.



    Technical Profile

    Here’s a look at the stock’s latest technical chart.

     

    • Current Price Action/Trends and Pivots: The diagonal red line traces the stock’s upward trend until March of this year and provides the reference for calculating the Fibonacci retracement levels indicated by the horizontal red lines on the right side of the chart. I already referred to the stock’s rebound in price over the last couple of days, which has made the stock one of the top performers in the market right now. Seeing more people talking about value is a good conversation for the market to have, and it could contribute to seeing the stock recover even more. As of this morning it is a little above its 50-day moving average (not shown) after having crossed above that line yesterday. That is a good indication of strong short-term momentum. The stock has strong resistance in the $28 range from previous pivots in late 2017. This is a level that is also consistent with the stock’s 200-day moving average (also not shown) at with the 50% Fibonacci retracement level shown on the chart. I’m not ignoring the resistance at around $26 shown by the 38.2% retracement line, but given the confluence of data points around $28 I think we are more likely to see strong resistance at that level.
    • Near-term Keys: If you like to work with trend-based, momentum-focused trading methods, the stock’s current price level looks like it is building to a nice trend reversal. The stock would need to break above $26 to confirm an actual trend reversal and would probably act as the best signal for a short-term swing or trend-based trade by buying the stock or using call options. The stock’s trend support is a little below $21, and if the stock breaks down below that level, its downward trend could push the stock to somewhere between $14 and $18 per share based on lows it hasn’t seen in more than five years. Bearish trades on this stock would only really be appropriate if the stock breaks below the $21 level.


  • 11 Jun
    GT is super-undervalued; is it time to buy?

    GT is super-undervalued; is it time to buy?

    Before the beginning of 2018, finding stocks that you could really call undervalued in any kind of realistic sense was becoming more and more difficult, simply because the broad market had been following a nearly uninterrupted upward trajectory since 2012, extending the bull market in the United States into a ninth year. Since that point, there has been a lot of uncertainty in the market, driven by geopolitical concerns, such as a trade war between the U.S. and its largest trade partners, rising interest rates and worries about accelerating inflation. That has driven a lot of stocks in the market down to levels that would make any value-oriented investor start to pay closer attention. GT fits into that category; after hitting a peak at nearly $35 per share in late January, the stock tumbled more than $10 per share at its lowest point, reached just last week. That’s a decline of more than 28% since the end of January until late last week.

    Of course, the mere fact that a stock is trading at a discount relative to historical highs isn’t enough by itself to say that the time is right to jump back in. Stocks that get beat down to extreme lows often have good reasons for investors to treat them that way; sometimes there are really critical problems at the business that make the stock’s higher price levels completely unreasonable. GT’s story doesn’t fit exactly into the picture I’ve just described, and truthfully there are some important external factors at play, like tariffs on autos imported from Mexico, Canada and the European Union, as well as higher crude prices, that I expect could continue to keep pressure on the stock in the near term; at the same time, however I think there is an interesting argument to make right now about this stock as a good value-oriented opportunity.

    It’s important to note that while concerns about things like tariffs and increasing crude costs might impact companies like GT in the long term, nothing is certain. Even now what impact tariffs will actually have, and whether they will hold on a long-term basis remains to be seen. While these are issues to be aware of and worth paying continued attention to, they also shouldn’t discourage you from considering the stock as a good investing opportunity if the right conditions show themselves.



    Fundamental and Value Profile

    The Goodyear Tire & Rubber Company (GT) is a manufacturer of tires. The Company operates through three segments. The Americas segment develops, manufactures, distributes and sells tires and related products and services in North, Central and South America, and sells tires to various export markets. The Americas segment manufactures and sells tires for automobiles, trucks, buses, earthmoving, mining and industrial equipment, aircraft and for various other applications. The Europe, the Middle East and Africa (EMEA) segment develops, manufactures, distributes and sells tires for automobiles, trucks, buses, aircraft, motorcycles, and earthmoving, mining and industrial equipment throughout EMEA under the Goodyear, Dunlop, Debica, Sava and Fulda brands. The Asia Pacific segment develops, manufactures, distributes and sells tires for automobiles, trucks, aircraft, farm, and earthmoving, mining and industrial equipment throughout the Asia Pacific region, and sells tires to various export markets. GT’s market cap is $6.1 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings decreased by a little over 32%, while sales grew slightly.
    • Free Cash Flow: Free Cash Flow is healthy, at a little over $200 million over the past twelve months. This number has declined since late 2015 when it peaked at about $1 billion.
    • Debt to Equity: the company’s debt to equity ratio is 1.13, which is a little above what is normally considered desirable; however their balance sheet indicates operating earnings are more than sufficient to service their debt. Cash and liquid assets are also healthy and translate to a cash yield of more than 10%.
    • Dividend: GT pays an annual dividend of $.56 per share, which translates to an annual yield of 2.18% at the stock’s current price.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for GT is $20.69 per share. At the stock’s current price, that translates to a Price/Book Ratio of 1.23. The Media industry’s average is 1.9, while their historical average is 2.375. If you use the industry average as a more conservative long-term target, the stock could rise to about $39 per share, which is above its highest point in almost 20 years.



    Technical Profile

    Here’s a look at the stock’s latest technical chart.

    • Current Price Action: Over the last week or so, GT found support at around $24 per share and has bounced a little bit from that point. The stock has been under a lot of pressure since late January, with the biggest drop occurring in February, after which the stock’s downward trend began to decelerate a bit. The current support level looks like it could mark trend support for the time being, while the stock’s pivot high in mid-may a little above $26 is the most likely next resistance point.
    • Trends and Pivots: The red diagonal line represents the stock’s intermediate-term trend, which is clearly down. In the last couple of days the stock has broken above that line and appears to be building some good bullish momentum. The solid, horizontal green line represents the stock’s most immediate support level, which is a little above $24, and the dotted red line marks where I think the stock is likely to find its next point of resistance, just a bit above $26 per share. If the stock is to truly break the strength of the intermediate-term downward trend, it will need to break above that resistance. I think a move to anywhere from $26.50 to $27 could mark the beginning of that reversal. If the stock breaks down and moves below its current support around $24, it would likely continue to drop to as low as $19, which marks a pivot low point the stock last saw in late 2015.
    • Near-term Keys: Watch the stock’s movement carefully over the next week or so. A move to $26.50 or $27 would mark a big bullish breakout and should give the stock plenty of room to rally into the $30 range and possibly higher; that could offer an attractive bullish trade, either by buying the stock or working with call options. On the other hand, a break below $24 could see the stock drop as low as $19 per share in the near term, which might offer an attractive bearish trade, either by shorting the stock or using put options.


    By Thomas Moore Auto Industry Investiv Daily