It has been a tough couple of years for auto parts company shareholders. Trade wars and tariffs have dominated headlines, with the auto sector being a primary target.
As tariffs rise on auto exports, the trickle-down effect of the potential lower demand is hitting Canada’s auto industry hard.
On Friday, China announced its intentions to levy tariffs on another $75 billion worth of goods from the United States. Along with that announcement, China also said it will resume duties on U.S. automobiles as of December 15th. Unfortunately, expect Canada’s auto part companies to get hit again.
How badly have they been hit? Here is a quick snapshot of Canada’s auto part companies:
Magna International (TSX:MG)
- 1-Yr Performance: -6.77%
- P/E Ratio: 6.23
- Forward P/E: 7.16
Exco Technologies (TSX:XTC)
- 1-Yr Performance: -19.30%
- P/E Ratio: 10.00
- Forward P/E: 8.32
Linamar Corp (TSX:LNR)
- 1-Yr Performance: -23.97%
- P/E Ratio: 5.17
- Forward P/E: 5.03
Martinrea International (TSX:MRE)
- 1-Yr Performance: -24.77%
- P/E Ratio: 5.40
- Forward P/E: 3.72
- 1-Yr Performance: -45.21%
- P/E Ratio: 19.12
- Forward P/E: 11.80
Without exception, all of these companies are trading near 52-week lows. Likewise, they are some of the cheapest stocks in the country. Magna, Martinrea and Linamar are all trading near all-time low valuations. In fact, Magna recently made our list of some of the best Canadian stocks to buy right now.
They weren’t even this cheap during the financial crisis. One company that stands out is Martinrea International. The company is trading at a ridiculously cheap 3.72 times earnings and it has a PE to growth ratio (PEG) of 0.33. This is an important valuation metric as it compares current valuation to expected growth rates.
A PEG under one is a sign that the company’s share price is not keeping up with expected growth rates. Analysts expect Martinrea to grow earnings by an average of 12% annually over the next five years. It is the highest growth rate among the group. Likewise, when one takes into account the current macro-economic backdrop, it is quite impressive.
Investors with a long-term view could do quite well moving some investment dollars into the auto parts sector. An investment in either of these companies is not for the faint of heart. The companies will be at the mercy of ongoing trade wars and I expect them to be highly volatile.
The safest play of the group has always been and remains Magna International. It is an industry leader and its diversification has enabled it to weather this storm better than most. Analysts have a one-year target of $66.02 per share, which implies modest 2.2% upside.
If you are looking for the greatest potential return, then Martinrea deserves your attention. Analysts have a one-year target of $17.50 per share which implies 74.4% upside. Considering current valuation and expected growth rates, it offers an attractive risk-to-reward proposition.