Though the overall automotive industry has remained sluggish lately, Zacks senior auto industry analyst Paul Raman, CFA explains that there are solid buys to be had, as long as investors are willing to look beyond just the automakers.

How has the second quarter been for the automakers within your coverage?

At this time, the last four automakers I've updated reports on are all rated Hold. Now, each of these companies - Toyota Motor (TM), Honda Motor Company (HMC), General Motors (GM) and Nissan (NSANY) - have their own indivual stories to tell, but in general the industry trends point to some of the same things: the auto industry is facing tough times due to volatility in crude oil prices and global political and economic uncertainty.

What are some of the individual stories?

Well, in Toyota's case, this company continues to expand its production capacity in a manner that increases efficiency and meets local demand, while placing it on the way to
becoming the world's financially strongest automaker. It has a strong presence in North
America and has been successful in grabbing market share from the Big Three automakers. Moreover, the company also has a strong cash flow position and a strong balance sheet. But rising costs, pricing pressures and huge capital expenditures lead us to believe that major stock price appreciation from current levels will not be forthcoming in the near term.

Honda is expanding its business in Asia, growing its global network to increase efficiency and introducing new products to satisfy local markets. Further, capacity expansion plans in Asia, a new sales strategy in Japan, and the proposed launch of Accura in Japan inspire optimism about Honda's future prospects. However, unfavorable currency exchange rates, flat-to-lower sales in North America and increased competition will threaten HMC's global competitive position.

For GM, management's increased focus on the Asia/Pacific region, enhancement of the product portfolio and aggressive cost cutting are some of the positives of the GM story. But longer-term trends of weak North American sales, falling production volumes and rising raw material costs increase our concerns.

Nissan, however, has been accelerating its growth and increasing market share with the aid of several successful product launches. The company has various new launches planned for the current fiscal year. The current Nissan Value-Up plan targets to attain sales of 4.2 million units by fiscal 2009 and a minimum 20% return on invested capital. Then again, there are concerns about launch costs and the rise of commodity prices. Further, the overall automotive industry environment is challenging with volumes going down. Thus, we rate the stock a Hold with a target price of $22.00.

Are things any better on the auto suppliers' side of the industry?

Actually, they really are. For instance, Stoneridge (SRI) is aggressively cutting costs and benefiting from the growth of the overall commercial vehicle market. Increased use of electronics in vehicles is also benefiting the company. We rate the shares of Stoneridge a Buy with a target of $13.50. SRI designs and manufactures engineered electrical and electronic components, modules and systems for the automotive, medium and heavy-duty truck, and agricultural vehicle markets.

For TRW Automotive (TRW), which is a global leader in the development and supply of active and passive safety technologies, this is a company that has excellent long-term prospects. Primarily this is because of the increasing emphasis being put on safety awareness by the government and consumers. Management is re-evaluating its cost structure and is keen on undertaking restructuring activities. We rate the stock a Buy with a target price of $45.00.

Another Buy recommendation I currently have is on the leading auto parts supplier to original equipment manufacturers (OEMs) and the aftermarket, Tenneco (TEN). Tenneco is witnessing revenue improvements and has been successful in cost reduction efforts and restructuring activities. The company holds a leading position in nearly every product category it offers. Moreover, diversification has proved to be a major positive for the company.

What risk factors exist for investors who may be looking to diversify into the auto supplier segment?

Our primary concern is the soft automotive climate in a general sense. Persistent production cuts announced by Ford (F) and General Motors remain a matter of concern. The pricing environment remains challenging, as well. Suppliers like TRW are feeling the pinch, as OEMs demand more concessions in the face of profitability constraints. This, coupled with weak volumes, risk putting margins under pressure for these kinds of companies.

Paul Raman, CFA is a senior analyst covering the auto industry for Zacks Equity Research.