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TRW: An Auto Stock For All Seasons

 March 21, 2012 10:44 AM
 


Author: Tyler Kocon, Split Rock Private Trading
Covestor model: Equity Rotation

Currently, the average age of cars and light trucks in the U.S. is 10.8 years. The average age of cars and light trucks in the U.S. back in 1996 was 8.4 years, according to R.L. Polk & Co. That is an increase of over 28%. Why does it matter that the average car on the road is so much older than it was 15 years ago? As the economy recovers and American consumers are starting to spend again, it stands to reason that vehicle purchases, especially if the average age of a car on the road is 10.8 years, could be on the rise.

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Looking at new vehicle sales data found on motorintelligence.com, it is pretty clear that vehicle sales are indeed on the rise. Total car sales for February 2012 were up 23.9% versus February 2011. Light truck sales were up 7.6% year-over-year this past February and SUV sales were up 11.8% in the same time frame. These increased auto sales seem to have contributed to a good start to the year for auto manufacturers. How can investors benefit from these increased auto sales?

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From an investment standpoint it seems pretty simple - buy Ford (F) or General Motors (GM) or Toyota Motor Corporation (TM) and hopefully participate in the increasingly robust returns of the automotive industry. There's just one major question left to answer: Which auto company do you choose? Year-to-date Ford, General Motors, and Toyota are all beating the S&P 500's returns by more than 5%, according to data compiled by Google Finance.  General Motors and Toyota have both returned over 26% year-to-date.

So far this year almost any major manufacturer would have been a good pick. It seems that the automotive industry as a whole is fairly healthy at the moment but choosing one manufacturer over another can be difficult. That's when a company like TRW Automotive (TRW) could be a diamond in the rough.

What are some things that all cars have in common? Autos need items such as seatbelts, steering wheels and airbags. Instead of trying to single-out which manufacturer is the best, why not find a company that provides products to a wide array of auto companies? That is exactly what TRW Automotive does. TRW supplies manufacturers with everything from electronic and steering systems, to braking systems and occupant safety systems.

So far this year TRW is up over 42% (again this is from Google Finance) and still only has a P/E of 5.26. With a beta of 3.46 this stock may not be for the faint of heart but if you feel that the economy is improving and the automotive industry is picking up steam, then TRW may deserve a place in your portfolio.


Disclosure: Long TRW

Covestor Ltd. is a registered investment advisor. Covestor licenses investment strategies from its Model Managers to establish investment models. The commentary here is provided as general and impersonal information and should not be construed as recommendations or advice. Information from Model Managers and third-party sources deemed to be reliable but not guaranteed. Past performance is no guarantee of future results. Transaction histories for Covestor models available upon request. Additional important disclosures available at http://site.covestor.com/help/disclosures. For information about Covestor and its services, go to http://covestor.com or contact Covestor Client Services at (866) 825-3005, x703.

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