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By November 9, 2012 7 Comments

Emerging Growth Auto Supplier Companies Benefit from Manufacturing Rebound

Emerging Growth Auto Supplier Companies benefit from Manufacturing Rebound

Emerging Growth Auto Supplier Companies benefit from Manufacturing Rebound

Playing the automotive sector by suppliers at this point appears to be the most prudent and effective growth approach over the next couple of quarters. Pullbacks in securities such as American Axle (NYSE: AXL), Linamar (TOR: CA: LNR) and Federal-Mogul Corp (NASDAQ: FDML) will provide a great opportunity for investors to benefit substantially over the next couple of months. The aforementioned three supply multiple auto companies and stand to appreciate greatly from a global manufacturing rebound that appears to be bottoming out. And with government money behind much of the automotive industry, the suppliers will continue to benefit.   

Global manufacturing has been trying to find some solid ground as leaders such as China, Germany and the US have been teetering along the contraction/expansion levels. Last week, China’s official PMI reading came in relatively in-line with expectations, rising to 50.2 vs. 49.8. The modest ongoing improvement back into expansion territory has reinforced expectations that China’s economy likely bottomed at the end of Q3. Conversely, it has diminished any real hope of further stimulus from the PBOC. The HSBC sub-index for new orders also jumped to its highest level since October 2011 to 51.2, suggesting that China’s economy may see better economic growth ahead.

Recent October PMI data out of Germany showed that manufacturing fell to 45.7 vs. 47.4. Within the numbers new export orders dropped further to 41 from 42.4 as Asian demand slumped and weakness in southern Europe was also detrimental. The survey compiler Markit notes the indices suggest a 0.3% GDP contraction in Q3, followed by -0.2% in Q4, which effectively means that the biggest EMU nation could be headed for a recession. That said, the worst might be over as the manufacturing sector stays off its lows and services staffing levels appeared to have risen. The Bundesbank was quite upbeat for Q3, expecting positive growth and some flattening out in Q4, which may prove true, but just a bit late.

Last week ISM manufacturing for October came in slightly better than expectations, as the headline index was 51.7 compared to a 51.5 reading in September (the first reading above 50 in 4-months. The new orders index for October came in at 54.2 vs. a prior 52.3, however, the orders backlog index continued to fall, dropping to 41.5 vs. a prior 44.0. Moreover, the employment index came in at 52.1 vs. a 3-month high of 54.7 last reading.  Primary metal firms noted slower sales and orders while fabricated metal makers said some general softening in steel and auto markets.

Last week vehicle sales came in a bit light, as Chrysler sales were up just 10% compared to the median of 15%. Ford (NYSE: F) reported sales that were up just 0.3% against a median estimate of 3.2%. General Motors (NYSE: GM) reported a rise of 4.7% year-over-year, compared to consensus of 7.8%. Toyota sales were also up 15.8% year-over-year in October against a median estimate of 26%. In summary, the four largest auto sellers in the US have all posted substantial misses relative to estimates. Most folks are betting on a manufacturing rebound in Q1 of next year, as many on the Street believe that the dip in auto sector has effectively bottomed out.

Playing the automotive sector by suppliers at this point appears to be the most prudent and effective growth approach over the next couple of quarters. Pullbacks in securities such as American Axle (NYSE: AXL), Linamar (TOR: CA: LNR) and Federal-Mogul Corp (NASDAQ: FDML) will provide a great opportunity for investors to benefit substantially over the next couple of months. The aforementioned three supply multiple auto companies and stand to appreciate greatly from a global manufacturing rebound that appears to be bottoming out. And with government money behind much of the automotive industry, the suppliers will continue to benefit.

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