Automotive component suppliers are ideal investments in times of uncertainty, as automakers will continue to need a range of components even if sales volume declines. In addition, many auto companies are likely to respond to the recession by focusing on cheaper models that don’t cost them as much. This means that, sooner than not, auto parts suppliers will benefit from this shift in consumer tastes and preferences. That said, these stocks can be volatile and risky bets; they are usually significantly affected by demand shocks in the automotive industry.
TEN supplies various parts to the car manufacturers Toyota, Honda and Ford. The company has a long history in the auto industry and as a backing component has seen 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 track record of paying down its debts and interest payments are only $140 million a year. Sales have declined slightly in the past year, but are still over $8 billion. Gross margins are a healthy 33% and the company’s operating margin is a robust 17%. TEN has a P/E ratio of 10.6, slightly above the 5-year average of 10.
Luminar Technologies (LAZR)
LAZR is a smaller company that specializes in producing headlights and taillights. Automotive lights have become much more critical in recent years as governments focus more on vehicle safety. LAZR has experienced a recent wave of increased demand for its sunshine, with sales up 10% in the first quarter of 2019. The company was also profitable, with a net income up 11% over the same period. LAZR has a strong balance sheet with $90 million in cash and $800 million in debt. Debt is a double-edged sword; it can help a business grow if used wisely, but it can also be a burden when times get tough. LAZR has a healthy operating margin of 14% and a P/E ratio of 10.0.
QuantumScape, a research and development company, is the most speculative game of this auto parts article. Automotive companies will always have a strong need for R&D as they have to comply with safety and environmental regulations. QS has benefited from a wave of increased automotive R&D spending. Car companies have spent a lot on developing electric and self-driving cars. While these technologies are revolutionary, they are still costly. As a result, auto companies have chosen to slow down their production and wait for these technologies to become cheaper before starting to place large orders for them. As a result, demand for components has been high and companies like QS have been able to take advantage of the high demand and prices for their products.
Aptiv, a major supplier to the auto industry, is a safer bet than some of the smaller companies on this list. Aptiv is active in all aspects of the automotive industry, including making electrical drive systems and sensors. Aptiv has seen sales surge in recent quarters, with the company’s first-quarter earnings up 8%. 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 off its debt quickly, with only $1.4 billion left as of Q1 2019. Aptiv has a healthy operating margin of 18% and its P/E ratio is 12.0.
The auto industry is cyclical, but auto parts are less cyclical than automakers. As a result, auto parts suppliers are ideal investments in times of uncertainty, as automakers will continue to need a range of features even if sales volume declines. In addition, many auto companies are likely to respond to the recession by focusing on cheaper models that don’t cost them as much. This means that, sooner than not, auto parts suppliers will benefit from this shift in consumer tastes and preferences.