Autos Auto Parts
The top auto analysts in this year’s Best on the Street survey had to look long and hard to find winners in a struggling industry. Detroit’s Big Three auto makers and many of their suppliers are losing money, and vehicle sales in the U.S. were down last year.
The winning stock pickers trained their sights on diversified parts manufacturers that are well-positioned in more-robust overseas markets, such as BorgWarner Inc.
No. 1 in the group, Richard M. Kwas, 36, of Wachovia Corp.’s Wachovia Capital Markets in Baltimore, has had a buy recommendation on BorgWarner (2) since May 2005. The company manufactures parts that improve vehicle efficiency, including emissions-curbing exhaust systems and turbochargers for diesel engines — the kind of equipment that is in increasing demand with gasoline prices rising.
The shares returned 65% in 2007. BorgWarner’s main advantage last year may have been its limited exposure to the Big Three. It recently cut production domestically but is securing new business in Europe, where half of all new passenger cars are diesel.
The company’s “balance sheet is one of the best in the business,” says Mr. Kwas, a winner in these rankings three years in a row.
His top pick for this year is Tenneco Inc. He says the maker of auto-emissions controls is still an “undiscovered story.” Governments around the world have tightened emissions standards for diesel engines, he says, and the company has met the need for parts required to filter emissions. Tenneco is “attractively priced,” he says, but the “balance sheet is one area of concern” because of a high debt-to-capital ratio.
No. 2 analyst Brett D. Hoselton of KeyBanc Capital Markets, a subsidiary of KeyCorp, scored with Johnson Controls (2) Inc., a provider of seating and instrument panels to auto makers. His buy rating all year yielded a return of nearly 28%. Because the company also provides heating and air-conditioning control equipment for buildings, its revenue diversity has helped it weather troubled times in the auto market, says the 42-year-old analyst, who also is returning to these rankings for the third time.
He also had a buy rating all year on BorgWarner.
This year, Mr. Hoselton likes ArvinMeritor (2) Inc., a maker of parts for commercial trucks. He expects the company to rebound in the North American market by early 2009, largely due to the need to replace aging parts. “It’s a longer-term buy,” he says. He upgraded ArvinMeritor in January 2008 to buy from hold. Mr. Hoselton credits the company with smart restructuring that not only closed domestic plants and transferred work abroad, but also focused on obtaining economies of scale in purchases of materials.
The sector’s No. 3 stock picker, Brian A. Johnson of Lehman Brothers Holdings Inc., also liked Johnson Controls, earning a 36% return before downgrading it to hold in early December. He avoided a decline in the share price for the rest of the year.
The 48-year-old Mr. Johnson says he now likes the outlook for Dana Holding (2) Corp., a maker of axles, brakes and truck frames. The company emerged from bankruptcy protection in February and last month selected former Toyota Motor Corp. manufacturing executive Gary Convis as its new chief executive. “It used the bankruptcy process to clean up its balance sheet,” Mr. Johnson says.
Tags: Auto, auto emissions, auto maker, auto makers, Auto Parts, borgwarner inc, capital ratio, cars, chase, emissions controls, emissions standards, gasoline prices, hoselton, instrument panels, lehman brothers, new passenger cars, passenger cars, s market, smart, tenneco inc, Toyota, toyota motor, vehicle efficiency, wachovia corp, weather
