Why GM, Lear And Delphi Might Be The Best Auto Plays

Now that Q2 earnings season has drawn to a close for the auto industry, Credit Suisse analyst Dan Galves released a new report recapping the quarter and updating the firm’s outlook for the industry.

Despite worries about China, Galves sees several reasons for auto investors to remain optimistic.

Q2 Trends

Overall, Q2 was a strong quarter for the auto industry.

For the fourth consecutive quarter, supplier EBIT outperformed expectations, and Galves notes that stronger European production schedules in the second half of the year could continue to drive outperformance.

Reasons For Optimism

According to the report, there are three reasons investors should continue to be optimistic. First, mix and content numbers drove top-line growth well above the modest 2.5 percent increase in production in Q2. Second, confidence in sustained Western European demand growth has been climbing and production schedules have recently been raised.

Finally, Galves is calling for increased capital return programs from many auto names based on the strength of the companies’ balance sheets.

China’s Shadow

Despite the fundamental improvements within the industry, fears about China weakness have weighed on auto stocks. Galves believes that the market is being overly cautious.

“The bottom line is our downside scenario (0% industry growth through 2017 and 20% cut to China backlog) would add ~0.5x to current P/E multiples… but P/E’s have compressed by 1.5-2.0 turns since early June,” he explains.

Top Picks

Galves remains bullish on the global auto industry based on strong market fundamentals and reasonable current valuations. Credit Suisse names Lear Corp LEA and Delphi Automotive PLC DLPH its top two stock picks in the space, but is also bullish on Magna International Inc MGA.

Galves also notes that the firm prefers General Motors Co GM over Ford Motor Co F.