In a new report, UBS analyst Colin Langran discusses the buying opportunity that the firm sees in auto suppliers. According to Langran, the risk for top stocks is majorly skewed to the upside.
“The combination of improving earnings and lower valuations has created a compelling buying opportunity for select names,” he explains.
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Langran notes that auto supplier stocks are down about 29 percent since last May, despite UBS’s 13 percent 2016 EPS growth forecast.
UBS now believes the potential upside is now 2.8 times larger than the downside for the firm’s Buy-rated suppliers. UBS believes its top stocks are underpriced by up to 60 percent, but would fall as little as 20 percent in a global recession scenario.
In picking out top names, UBS looks for suppliers with low leverage, secular growth, strong management and margin expansion opportunities.
UBS analysts are currently estimating a 23 percent chance of a U.S. recession in 2016. When estimating the potential downside to auto suppliers in this unlikely scenario, UBS uses the trough in EV/EBITDA of about 5.6x from the 2000 recession as its guide.
UBS has upgraded Delphi Automotive PLC (NYSE: DLPH) from Neutral to Buy. In addition, the firm maintains Buy ratings on BorgWarner Inc. (NYSE: BWA), Johnson Controls Inc (NYSE: JCI), Visteon Corp (NYSE: VC), Lear Corporation (NYSE: LEA) and Tenneco Inc (NYSE: TEN).
Disclosure: the author holds no position in the stocks mentioned.
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