Putting your portfolio in the fast lane
Investing in fast-growing auto-parts companies is a better option than shares in carmakers
The auto industry played a huge part in the industrialization of North America in the last hundred years.
But for equity investors, the story hasn’t been as successful. In the U.S., there were about 2,000 auto companies during the 20th century. Only three are still around. And the last decades have been tough for their shareholders.
Japanese car companies have done a little better. But the one that has impressed me most lately is Tata Motor, the largest automobile company in India. The Indian auto industry has grown at 12-per-cent annually over the last 10 years. And Tata has introduced several new models lately: the very- low-price Nano and Indica in its compact line. In addition, it acquired Jaguar Land Rover during the financial crisis, and that division has done very well lately. The stock has also done well recently, doubling since its fall lows. Still, at $29, it trades at only eight times this year’s earnings estimates.
But big changes are coming to the industry: the electric car. The Californian company Tesla Motors looks very dynamic, but it’s too early to see how solid its business model will be (it’s not profitable yet). On another continent, the Chinese company BYD had a great run in the last few years, but last year profits were down considerably. It seems to be at the forefront of developments in the electric-car battery. Making a cheap and long-lasting battery for electric cars will be the Holy Grail in the industry in the coming years. BYD seems quite promising in that quest.
Realistically, it’s quite difficult to predict which car company will do better than others. That is why I prefer to invest in auto-related companies instead of the car companies. For example, auto-part retailers have done extraordinary well in the last few years. I’ve owned O’reilly Automotive since 2004 and — in eight years — earnings have quadrupled (and the stock has increased fivefold). Other players have also done well, including Autozone and Advanced Auto Parts. Owners are keeping their vehicles longer than before, so auto-parts retailers have surfed that wave. And these three companies have admirably managed their capital (Autozone has bought back more than 63 per cent of its shares over the last decade), so its shareholders were rewarded in more than one way.
There are also companies that have built some interesting niches in this huge industry. Carmax, for example, has revolutionized the used-car retail industry. Once dominated by mom and pop stores and new-car stores, Carmax is offering consumers great service, great prices and solid warranties. It grew from one store in 1993 to 107 stores and now generates $10 billion in revenue. But it still has less than three per cent of the market. I can see this company grow at 15 per cent a year for at least another decade. And the stock sells at a reasonable 16 times estimated earnings.
Another niche player is Copart. Basically, the company sells used, damaged or recovered stolen vehicles (for insurance companies, for example) through online auctions. The company sells to licensed vehicle dismantlers, re-builders, repair licensees, used-vehicle dealers and exporters, as well as the general public. In the last five years, earnings have grown 13 per cent per year. Last year, Copart bought back more than 15 per cent of its shares and EPS are estimated at $1.43 this fiscal year. The stock is not cheap at $27, but the company is quite something.
Francois Rochon is the head of wealth-management firm Giverny Capital, which he founded in 1998.