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Auto components suppliers are ideal investments in times of uncertainty, as auto manufacturers will continue to need a range of components even if the sales volume declines. In addition, many auto companies will probably react to the recession by focusing on cheaper models that don’t cost them as much. This means that auto parts suppliers are more likely than not to benefit from this shift in consumer tastes and preferences. That being said, these stocks can be volatile and risky bets; they tend to be significantly impacted by demand shocks in the auto industry.
Tenneco
TEN supplies various components to the automakers Toyota, Honda, and Ford. The company has a long history in the auto industry, and as a support component, it has enjoyed much less volatility than other auto stocks. The company has a strong balance sheet, with $2.4 billion in cash and $4.8 billion in debt. TEN has a good record of paying down its debt, and its interest payments are just $140 million per year. Sales have declined slightly over the past year, but they’re still over $8 billion. Gross margins are a healthy 33%, and the company’s operating margin is a robust 17%. TEN has a price-to-earnings ratio of 10.6, slightly above its 5-year average of 10.
Luminar Technologies (LAZR)
LAZR is a smaller company specializing in producing headlights and taillights. Auto lights have become much more critical in recent years as governments focus more on vehicle safety.LAZR has ridden a recent wave of increased demand for its sunshine, with sales up 10% in the first quarter of 2019. The company has also been profitable, with net income up 11% in the same period. LAZR has a strong balance sheet with $90 million in cash and $800 million in debt. Debt is a two-edged sword; it can help a company increase if used wisely, but it can also be a burden if times get tough. LAZR has a healthy 14% operating margin and a P/E ratio of 10.0.
QuantumScape (QS)
QuantumScape, a research and development firm, is this article’s most speculative play on auto components. Auto companies will always have a strong need for R&D, as they have to keep up with safety and environmental regulations.QS has been benefiting from a wave of increased auto R&D spending. Auto companies have been spending a lot on developing electric and self-driving cars. While these technologies are revolutionary, they are still costly. As a result, auto companies have elected to slow down their production and wait for these technologies to become cheaper before they begin to place large orders for them. As a result, the demand for components has been high, and companies like QS have been able to profit from the high demand and prices for their products.
Aptiv (APTV)
Aptiv, a significant supplier to the auto industry, is a safer bet than some of the smaller companies on this list. Aptiv operates in all aspects of the auto industry, including making electric drive systems and sensors. Aptiv has seen sales increase in the past few quarters, with the company’s earnings up 8% in the first quarter. Aptiv has a strong balance sheet with $1.4 billion in cash and $4.4 billion in debt. Debt can be a burden, but Aptiv has been able to pay down its debts quickly, with only $1.4 billion remaining as of the first quarter of 2019. Aptiv has a healthy 18% operating margin, and its P/E ratio is 12.0.
Conclusion
The auto industry is cyclical, but auto components are less cyclical than auto manufacturers. As a result, auto components suppliers are ideal investments in times of uncertainty, as auto manufacturers will continue to need a range of features even if the sales volume declines. In addition, many auto companies will probably react to the recession by focusing on cheaper models that don’t cost them as much. This means that auto parts suppliers are more likely than not to benefit from this shift in consumer tastes and preferences.
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