If that Clint Eastwood ad earlier in the year didn't convince you, then maybe General Motors' best year ever should have: The U.S. auto industry is on the mend. Americans will probably buy at least 14 million new vehicles this year, the most since 2007, and a big bounce back from the low of 10.4 million bought in 2009. And even after a hefty run-up in some auto-related stocks, savvy investors are jumping into the stocks of everything from seat belt manufacturers to auto dealers. "It'll be a good rebound year," says financial planner David Kudla, CEO of Mainstay Capital Management in Grand Blanc, Mich.
Some might chalk up Kudla's enthusiasm to rooting for the home team -- a lot of his clients work for automakers -- but the numbers back him up. New-auto sales tend to track four economic indicators, says Jesse Toprak, vice president of market intelligence for TrueCar.com, an online publisher of new-car pricing data: the unemployment rate, new-home starts, consumer confidence and the Dow Jones Industrial Average. Most of these are improving, to varying degrees. Analysts expect that within a few years -- barring a major economic setback -- auto sales can return to the roughly 16 million a-year figure the nation was averaging from 2000 to 2007. American firms are benefiting from the evolving love affair with cars in emerging markets too. China has surpassed the U.S. as the world's top car buyer, with sales of 18.5 million vehicles last year.
Analysts say these stocks could benefit from a continuing rebound in the U.S. auto industry.
Ford Motor (F)
The one member of the Big Three that didn't take government aid during the meltdown, Ford has slashed debt and reinstated its dividend. It also divested itself of some brands to focus on more popular models, like its F-series trucks. "It's a new Ford," says Channing Smith, co portfolio manager of the $27 million Capital Advisors Growth fund and a shareholder.
Penske Automotive Group (PAG)
This Bloomfield, Mich., vehicle dealer bought seven franchises in 2011 and has invested heavily in upgrading all of its facilities. "We want scale in these markets," CEO Roger Penske told investors this winter. The strategy seems to be working: Last year was Penske's most profitable ever.
Dana Holding (DAN)
Truck sales are up, and that's good news for this Maumee, Ohio, company, which makes axles, driveshafts and other parts. Dana gets 20 percent of its revenue from construction, farming and mining vehicles, and it should benefit from growing global demand for commodities, says Brian Sponheimer, automotive and trucking analyst for Gabelli.
TE Connectivity (TEL)
The Switzerland-based spin-off of the old Tyco makes electronic components like connectors for cars and other applications. TE has a high return on capital, unlike many capital-intensive auto manufacturers, says Daniel O'Keefe, portfolio manager of the $149 million Artisan Global Value fund.
Genuine Parts (GPC)
This Atlanta partsmaker is a "cash flow machine," Sponheimer says. Like many of its rivals in the parts business, it's not a bargain, trading at 15 times this year's expected earnings, versus 14 for Standard & Poor's 500. But it has a 3.2 percent dividend yield, and "you can set your watch to GPC increasing its dividend on an annual basis," Sponheimer says.
At the same time, America's car industry is considerably more profitable than it was the last time the good days rolled by. Indeed, GM earned $7.6 billion in 2011, its best year, dollar-wise, in its 104-year history. While Ford Motor didn't break any profit records last year, 2011 marked the third year in a row that the Dearborn, Mich., carmaker improved annual operating profits. The firm slashed debt and, more recently, reinstated its dividend. Ford's sales in China grew 7 percent last year, and Ford and its local affiliates plan to build four new plants there.
The good news applies to dealers as well. Many of them don't even need to get back to the prerecession sales levels to post great profits, says James Albertine, automotive analyst for investment bank Stifel Nicolaus. Take Penske Automotive Group, which has 166 franchises nationwide and which has been buoyed by the resilience of luxury buyers. Penske relies heavily on BMW sales, and it has cut the amount of incentives offered to consumers. According to TrueCar, incentives per vehicle have fallen nearly 9 percent nationwide since 2009, the depths of the recession, when it seemed every buyer walked out of the showroom with zero percent financing.
Some investors are not as enthusiastic about replacement-parts firms, because their stocks have already had a tremendous run. Shares of parts supplier O'Reilly Automotive are up 64 percent in the past 12 months, and they now trade at 21 times next year's profits, a premium to the broader market. Nevertheless, even those companies can still increase their profit margins, says Dan Wewer, managing director at brokerage firm Raymond James. The current average car age in the U.S. is 11 years, higher than the historical average of nine years. The folks who don't buy a new car, Wewer says, are going to soon have to contend with pricey repairs such as alternator replacements.
To be sure, not everyone is sold on Detroit's rebound creating a sustained boom for all auto stocks. Car manufacturers typically trade cheaper than the broad market, partly because their strong unions sometimes hamper management's ability to make money for shareholders, says Daniel O'Keefe, portfolio manager of the $149 million Artisan Global Value fund. "It's a constant tug of war," he says. What's more, auto companies are capital-intensive and tend to have a lot of debt, so you have to be "very, very careful" what price you pay for them.
That said, even an auto-company skeptic like O'Keefe has some vehicle-related favorites, particularly TE Connectivity, a Swiss company that makes electrical components that are used in vehicles worldwide. Other analysts see promise in Dana Holding, a manufacturer of axles and other parts. In 2006, squeezed by cutbacks at the Big Three auto firms, Dana filed for bankruptcy protection. It emerged from Chapter 11 in 2008 and has rebounded. This February, in a sign of the industry's resurgence, the firm even started paying a small stock dividend.