8 auto parts stocks to buy; 2 to sell

Here are eight auto parts stocks that are ‘buys’ for capital gains potential over the next few years. But we also name two auto parts stocks you should sell—despite what most other financial analysts have to say.

Since we last examined auto parts stocks in October 2016, the 10 we regularly follow are down by an average of 0.4 per cent. This trails the 6.5 per cent rise in the S&P/TSX Composite index. Our eight ‘buys’ climbed by an average of six per cent. Our two ‘sells’ obviously held the whole group back.

Investment Reporter Key stocks AutoCanada (TSX—ACQ), Magna International (TSX—MG) and Oshkosh (NYSE—OSK) remain ‘buys’ for long-term gains and dividends. Magna is a ‘dividend aristocrat’, after raising its dividend five years in a row.

AutoCanada earnings expected to rise

AutoCanada’s earnings are expected to advance by a solid 16.7 per cent in 2017, to $1.88 a share. Its dividend of 40 cents a share is down from a peak of a dollar a share in 2015. The current dividend yields a modest 1.7 per cent.

The consensus recommendation of two analysts is that AutoCanada is a ‘buy’. We agree. It remains a buy for long-term share price gains as well as modest dividends.

Magna stock has upward price momentum

In 2017, Magna expects to generate sales of $36 to $37.7 billion. It’s expected to earn C$7.61 a share. This would represent earnings growth of 9.8 per cent. Based on this estimate, the shares trade at a price-to-earnings, or P/E, ratio of 7.6 times.

Next year, Magna’s earnings growth is expected to accelerate by 15.8 per cent, to C$8.81. This works out to a better P/E ratio of 6.5 times. Then again, P/E ratios are less useful for cyclical stocks, such as auto parts manufacturers.

In 2019, Magna expects to generate sales of $43.5 to $46.2 billion. This is a positive outlook.

The consensus recommendation of eight analysts is that Magna is ‘buy’. We agree. Buy the stock for long-term share price gains as well as decent and growing dividends.

Oshkosh also has upward momentum

In order to improve its earnings, Oshkosh is looking to cut costs. This is particularly true of the Access Equipment division. It plans to close a factory in Belgium and shift some manufacturing to low-wage Romania. The company also plans to reduce its portfolio of telehandlers in Europe where sales were poor.

The consensus recommendation of nine analysts it that Oshkosh is a ‘buy’. We agree. Oshkosh remains a buy for further long-term share price gains and modest dividends that have grown since they were reinstated in fiscal 2013.

Non Key stocks earnings are also growing

Linamar (TSX—LNR) and Uni-Select (TSX—UNS) remain ‘buys’ for long-term gains and rising dividends. Linamar Corp.’s 2018 earnings are expected to grow by 9.5 per cent, to $8.90 a share. Buy. Uni-Select Inc.’s 2018 earnings are expected to rise by seven per cent, to C$2.89 a share. Buy.

Martinrea International Group (TSX—MRE) pays flat dividends. Martinrea International’s 2018 earnings are expected to climb by 11.8 per cent, to $1.99 a share. Buy.

Pacific Insight Electronics (TSX—PIH) and Reko International Group (TSXV—REKO) pay no dividends but remain ‘buys’ for gains.

Reko remains a buy for several reasons. First, it’s cheap. The shares trade 35 per cent below their book value. They trade at a price-to-cash-flow ratio of 2.3 times. Ratios below five times can indicate a buy. And its price-to-earnings ratio is only 4.9 times the 86 cents we expect the company to earn in the year to July 31. Second, Reko has a strong balance sheet. It net debt-to-cash-flow ratio is a safe 0.2 times. Third, the shares have upwards price momentum. It remains a buy, if you need no dividends.

Sell these two stocks with continuing losses

Ballard Power Systems (TSX—BLD; NASDAQ—BLDP) and Westport Fuel Systems (TSX—WPRT; NASDAQ—WPRT) remain ‘sells’. Five analysts rate Ballard a ‘strong buy’ and two rate Westport a ‘buy’. We disagree. Ballard Power System’s 2018 loss is expected to lessen to three Canadian cents a share. Sell. Westport Fuel Systems’ 2018 loss is expected to lessen to 58 Canadian cents a share. Sell.

 

This is an edited version of an article that was originally published for subscribers in the March 24, 2017, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
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