Increased demand for vehicles and escalating technological advancements within the automotive industry could steer the auto parts industry toward a promising growth path. Therefore, auto parts stocks Modine Manufacturing Company (MOD), Allison Transmission Holdings, Inc. (ALSN), and Gates Industrial Corporation plc (GTES) could be solid buys this week.
The automobile industry has persevered through various challenges, such as inflationary burdens, chip shortages, and supply chain interruptions. Despite these obstacles, the industry exhibited remarkable durability by sustaining operations, meeting consumer needs, and tactfully pursuing avenues for growth.
An exemplification of this resilience can be observed in the rise of new vehicle sales in August, which surged by double-digit percentages compared to a year ago. Global auto sales for 2023 are expected to reach 86.8 million units, higher than the previous estimate of 86.4 million units.
In addition, IEA’s latest projections suggest a 35% year-over-year surge in EV sales for 2023, reaching 14 million units. Such explosive expansion places EVs on track to capture an even larger slice of the overall car market, potentially soaring to 18% by the end of 2023.
Meanwhile, a shift in consumer behavior can be observed as many Americans prefer used vehicles or fixing their existing cars. Consequently, their reliance on replacement auto parts and regular maintenance services is set to increase to keep vehicles road-worthy and efficient. The auto parts market is anticipated to reach $939.21 billion by 2028, growing at a CAGR of 6.3%.
The industry is poised for further growth thanks to the rising demand for automotive customization, the incorporation of advanced technologies like navigation and infotainment systems, and driver-assist features. The rise of e-commerce platforms supplying automotive parts also contributes to this expected growth trajectory.
Considering these conducive trends, let’s look at the fundamentals of the three best Auto Parts stocks, starting with number 3.
Stock #3: Modine Manufacturing Company (MOD)
MOD offers engineered heat transfer systems and components tailored for Original Equipment Manufacturer (OEM) vehicular applications in both on- and off-highway settings. The company’s operations are divided into two segments: Climate Solutions and Performance Technologies.
Last month, MOD partnered with TMS Johnson to help empower school leaders and facility managers to provide excellent indoor air quality solutions by offering a full range of school-focused HVAC products. MOD’s expansion further in the Midwest will enable school leaders and facility managers to access some of the best IAQ applications nationwide and would simultaneously bode well for MOD.
On August 15, MOD unveiled its electric infrared product line, the MEL Series. These commercial-grade high-intensity electric infrared heaters, boasting outputs spanning from 750 to 11,400 watts, feature a meticulously crafted reflector for maximizing radiant heat emission and employ replaceable tungsten elements for rapid heating onset.
This innovative product launch marks MOD’s strategic endeavor to broaden its array of energy-efficient and environmentally friendly heating solutions, catering to diverse applications in both commercial and residential settings.
MOD’s revenue grew at CAGRs of 9.9% and 2% over the past three and five years, respectively. In addition, its EBIT grew at 73.4% and 10.4% CAGRs over the past three and five years, respectively.
For the fiscal quarter that ended June 30, 2023, MOD’s net sales increased 15% year-over-year to $622.40 million, while its gross profit stood at $127.90 million, up 53.4% from the prior-year quarter. Its adjusted EBITDA grew 90.5% from the prior year’s period to $80.40 million.
Furthermore, net earnings attributable to MOD rose 213.3% year-over-year to $44.80 million, while its adjusted earnings per share stood at $0.85, up 165.6% from the prior-year quarter.
The company’s revenue and EPS for the fiscal quarter ending September 2023 are expected to increase 6.5% and 37% year-over-year to $616.18 million and $0.66, respectively. Also, the company surpassed the consensus EPS estimates in all trailing four quarters and revenue in three of the trailing four quarters, which is impressive.
For the fiscal year 2023, MOD expects its net sales to grow by 6% to 11% year-over-year, while its adjusted EBITDA is expected to be between $280 million and $295 million, an increase of 32% to 39% over the prior year.
Over the past year, the stock has gained 187.7%, closing the last trading session at $44.25. The stock gained 34.9% over the past three months.
MOD’s positive outlook is reflected in its POWR Ratings. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
MOD has a B grade for Growth, Sentiment, and Quality. It is ranked #16 out of 59 stocks within the A-rated Auto Parts industry.
Click here to access additional MOD ratings for Value, Momentum, and Stability.
Stock #2: Allison Transmission Holdings, Inc. (ALSN)
ALSN designs, manufactures, and sells commercial and defense fully automatic transmissions for medium- and heavy-duty commercial vehicles and medium- and heavy-tactical U.S. defense vehicles worldwide.
On September 6, ALSN was awarded a contract worth approximately $13 million for the second phase of the U.S. Army’s Low-Rate Initial Production contract for the newly named M10 Booker Combat Vehicle. The M10 Booker is one of the U.S. Army’s leading modernization initiatives and is designed to increase the combat power of the Army’s Infantry Brigade Combat Teams.
The U.S. Army is expected to purchase more than 500 MPF vehicles through 2035, representing approximately $250 million in revenue for ALSN’s Defense end market.
On August 31, ALSN paid the shareholders a quarterly dividend of $0.23 per share on the company’s common stock for the third quarter of 2023. It pays a $0.92 per share dividend annually, translating to a 1.55% yield on the current share price. Its four-year average dividend yield is 1.80%. Its dividend payments have grown at a CAGR of 10.9% and 8.5% over the past three and five years, respectively.
ALSN’s revenue grew at CAGRs of 8.7% and 2.9% over the past three and five years, respectively. In addition, its EBIT grew at 8.3% and 1% CAGRs over the past three and five years, respectively.
For the fiscal second quarter that ended June 30, 2023, ALSN’s net sales increased 17.9% year-over-year to $783 million. Its adjusted EBITDA grew 26.9% from the year-ago value to $288 million. Furthermore, the company’s net income rose 43.4% from the prior-year quarter to $175 million, while earnings per share came in at $1.92, up 52.4% year-over-year.
At the end of the quarter, cash and cash equivalent stood at $351 million, up 187.7% year-over-year. As of June 30, 2023, ALSN’s total current assets stood at $1.07 billion, compared to $866 million as of December 31, 2022.
Analysts expect ALSN’s revenue and EPS for the fiscal third quarter ending September 2023 to increase 7.1% and 14.8% year-over-year to $760.41 million and $1.66, respectively. It surpassed revenue and EPS estimates in each of the trailing four quarters.
The stock has gained 66% over the past year to close the last trading session at $58.78. Over the past six months, it gained 33.8%
It’s no surprise that ALSN has an overall A rating, equating to a Strong Buy in our POWR Ratings system.
It has an A grade for Quality and a B grade for Sentiment. It is ranked #8 within the same industry.
Beyond what is stated above, we’ve also rated ALSN for Growth, Value, Momentum, and Stability. Get all ALSN ratings here.
Stock #1: Gates Industrial Corporation plc (GTES)
GTES manufactures and sells engineered power transmission and fluid power solutions worldwide and operates in two segments: Power Transmission and Fluid Power. The company’s products are used in applications across various markets, including industrial off-highway end markets and industrial applications.
Last month, GTES also announced an expansion to its G-Force product portfolio. The G-Force WorkHorse CVT belt is designed to keep UTVs and ATVs moving through tough jobs and rough terrain. The product provides high operating performance and excellent heat resistance for better durability and load-carrying capability. The expansion could bode well for the company.
GTES’ revenue grew at CAGRs of 9.2% and 1.9% over the past three and five years, respectively. In addition, its levered FCF grew at 8.3% and 25.4% CAGRs over the past three and five years, respectively.
GTES’ net sales increased 3.3% year-over-year to $936.30 million for the fiscal second quarter that ended July 1, 2023. Its gross profit rose 8.1% over the prior-year quarter to $352.70 million. Its adjusted EBITDA increased 9.6% over the prior-year quarter to $197.30 million.
Its adjusted net income and adjusted net income per share came in at $101.60 million and $0.36, up 12.6% and 12.5%, respectively. Moreover, its net cash provided by operating activities came in at $183.90 million, compared to net cash used in operating activities of $81.80 million in the year-ago quarter.
For fiscal 2023, the company expects its core revenue to grow between 0% and 2%, while its adjusted earnings per share is expected to come between $1.18 and $1.24. It also expects its free cash flow conversion to be approximately 100%, and the capital expenditure for the whole year is expected to be about $100 million.
GTES’ revenue for the quarter ending September 2023 is expected to increase 2.2% year-over-year to $879.57 million, while EPS is expected to come at $0.31. For the fiscal year ending December 2023, Street expects its revenue and EPS to increase 1.4% and 5.3% year-over-year to $3.60 billion and $1.20, respectively.
GTES’ stock has gained marginally over the past year and year-to-date to close the last trading session at $11.47.
GTES’ POWR Ratings reflect its promising outlook. It has an overall rating of A, equating to a Strong Buy in our proprietary rating system.
GTES has an A grade for Value and a B for Growth, Stability, and Quality. It is ranked #5 within the Auto Parts industry.
To access the additional GTES ratings for Momentum and Sentiment, click here.
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ALSN shares were trading at $59.70 per share on Thursday morning, up $0.92 (+1.57%). Year-to-date, ALSN has gained 45.46%, versus a 18.19% rise in the benchmark S&P 500 index during the same period.
About the Author: Sristi Suman Jayaswal
The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors. More...
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