One of the major challenges currently facing the global economy is the shortage of semiconductors. These chips are used in all sorts of products beyond laptops, tablets, and smartphones. They are now essential for products such as refrigerators, washing machines, and automobiles. Due to these shortages, there are negative, secondary effects for the companies that manufacture the other components used in these products. 

Auto parts companies are maybe the best example. These companies are seeing revenue reductions as original equipment manufacturers (OEM) are placing smaller orders. However, there is a silver lining as many auto manufacturers noted in their earnings calls that the semiconductor shortage improved in Q3 compared to the previous quarter. Another constructive data point is that the number of new cars produced in October is estimated to be 13 million, an increase from 12 million in September.

This is the first sequential improvement in new car production since March when we peaked at 18 million new cars produced. This is also consistent with other data points such as shipping rates and the number of ships waiting off of ports declining, indicating that September may have been the “bottom” when it came to supply chain issues. Given that production should keep improving in 2022, 3 auto parts stocks that investors should consider buying are Meritor (MTOR), Genuine Parts Company (GPC), and Goodyear Tire & Rubber Company (GT).

Meritor (MTOR) 

MTOR was founded in 1909 and is based in Michigan. The company sells components to OEMs in the auto, truck, and aerospace markets. Some of its best-selling products include drivetrain systems, suspension systems for trucks, brakings, wheel hubs, shock absorbers, and air brakes. The company sells directly to OEMs in addition to parts dealers, independent distributors, and service garages. 

MTOR’s stock has been punished by the market for the drop in revenues. The stock is down 23% from its highs set earlier this year. Not coincidentally, the stock has dropped along with falling auto production. And, it’s started to rebound as the situation seems to be improving. Analysts are expecting a rebound in MTOR’s earnings next year, so its forward P/E is quite cheap at 6.5 especially compared to the S&P 500’s forward P/E of 21. As auto production returns to full capacity over the next couple of years, MTOR’s full-year EPS should exceed its pre-pandemic level of $5.

The POWR Ratings are also bullish on MTOR as the stock is rated a B which equates to a Buy rating. B-rated stocks have posted an average annual performance of 19.7% which compares favorably to the S&P 500’s annual performance of 7.1%. 

The POWR Ratings also evaluates stocks by different components to give additional insight into each stock. It’s not surprising that MTOR has an A rating for Growth given that revenue was 98% higher compared to last year in Q3. 

The POWR Ratings also provides component grades for other categories like Value, Momentum, Stability, Sentiment, Industry, and Quality. To see MTOR’s POWR Ratings, click here. 

Genuine Parts Company (GPC)

GPC was founded in 1928 and is based in Atlanta, Georgia. The company distributes automotive parts and industrial parts and materials. Its customers include all sorts of OEMs, aftermarket customers, and industrial customers. 

The company is well-regarded for being a dividend aristocrat which means it’s paid out its dividend for 25 straight years. Currently, only 65 companies qualify for this list. Such stocks typically garner a premium as this is an indication of a high-quality business with strong management. GPC pays a 2.4% yield which is above the 10 year Treasury yield and the S&P 500’s dividend.

Next year, analysts are projecting 27% earnings growth. This isn’t surprising considering the robust market for used and new cars. The shortages have resulted in tremendous, pent-up demand especially with low rates and flush households due to stimulus payments and a strong labor market. Further, the stock is attractive from a valuation basis with a forward P/E of 19.8 which is cheaper than the S&P 500.

The POWR Ratings are also bullish on GPC as it’s rated an A which equates to a Strong Buy. A-rated stocks have posted an average annual return of 30.7% which compares favorably to the S&P 500’s average annual return of 7.1%. 

The stock is strong across the board in terms of component grades as well. Given its long history and status as a ‘dividend aristocrat’, it’s not surprising that the stock is rated a B for Quality and Stability. To see more of GPC’s POWR Ratings, click here.

Goodyear Tire & Rubber Company (GT)

GT manufactures and sells tires and related products worldwide. It makes tires for all sorts of items including cars, motorcycles, trucks, buses, aircrafts, construction equipment, agriculture equipment, and industrial equipment. The company sells its products through retail outlets, distributors, and directly to OEMs. 

Currently, GT’s stock is in the midst of a breakout to new 52-week highs. However, it remains off its pre-pandemic highs of $36 by about 40%. New car production returning to full capacity could be the catalyst that takes GT back to these levels. 

Despite the stock’s recent gains, it is quite cheap with a forward P/E of 9.6. Wall Street analysts are particularly bullish on the stock. 7 out of 11 analysts have a Buy or Strong Buy rating with the other 4 rating it a Hold. Over the last couple of months, they have raised EPS guidance for Q4 by 25% and 2022 by 5%. 

Given these positive factors, it’s not surprising that GT is rated a B by the POWR Ratings, equating to a Buy rating. GT also stands out in terms of its component grades. 

The stock’s Growth grade of B is not surprising as it’s experiencing an 85% improvement in revenue and a 106% gain in earnings. In 2022, analysts are projecting full year EPS of 2.28 compared to 1.34 in 2021. In terms of industry grades, the Auto Parts sector is rated a B which makes sense considering the low valuations and potential catalyst of car production returning to full capacity. To see more of GT’s POWR Ratings, click here.

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This article was written by Jaimini Desai, Chief Growth Strategist for StockNews.com.  Jaimini has been dialed into the hottest trends in investing:

• Electric Vehicles
• 5G
• Internet of Things
• Cloud Computing
• Genomics
• And Much More

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GPC shares were trading at $133.40 per share on Thursday afternoon, down $0.81 (-0.60%). Year-to-date, GPC has gained 35.56%, versus a 25.80% rise in the benchmark S&P 500 index during the same period.

About the Author: Jaimini Desai

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...

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