Auto suppliers said to be top investment

September 30, 1992|By Andrew Leckey | Andrew Leckey,Tribune Media Services

The U.S. auto industry is in low gear as 1993 models are being rolled out, but at least it's moving again. With a modest 13 million vehicles likely to be sold this calendar year, improvement to 14 million is predicted by many analysts for 1993.

That's far short of the 15.5 million that historically would constitute a good year. But, with the industry in an outright depression the past two years, it'll take what it can get.

"Buy American" is being taken more seriously by car buyers, especially since domestic cars carry an average price tag that's $3,000 lower than foreign competitors.

Market share of Asian carmakers has declined in the past year to one out of four cars sold in this country. Many experts believe that will continue to decline, a result of economic and political pressures.

U.S. carmakers are leaner and more quality-conscious than ever before, and the introduction of some exciting new models -- especially from Chrysler Corp. -- seems to bode well.

Wall Street has become a believer. Despite some price pullback on sales worries, carmaker stocks are still up 36 percent this year and auto supplier stocks up 21 percent.

"People selling automotive stocks due to economic fears are wrong, for sales will pick up," predicts Ronald Glantz, analyst with Dean Witter Reynolds.

"U.S. carmakers are bringing products to market quicker, workers are better trained and capital spending will be coming down," Glantz said.

By the end of 1994, balance sheets of the Big Three carmakers will be at prerecession levels, Glantz expects. They'll get better each year thereafter.

But don't count out the Japanese yet.

"The Japanese are still incredibly good and are figuring out methods to reduce costs to keep them a potent force," says Joseph Phillippi, analyst with Shearson Lehman Brothers.

"Remember, the tables can turn almost overnight, as evidenced by the fact Honda a year and a half ago was considered infallible and now it's criticized by everyone."

According to James Alexandre, analyst with Donaldson, Lufkin & Jenrette, the supplier group is the best and safest way to play the industry. Many companies could double or triple profitability the next two years.

"U.S. carmakers are dealing with fewer suppliers, so the best companies will gain market share," Alexandre explains. "In addition, the Japanese will be sourcing more parts needs to U.S. firms."

Chrysler shares are recommended for purchase by Glantz and Phillippi, while Alexandre gives them his neutral rating because of their 75 percent price run-up this year. Chrysler's Jeep Grand Cherokee is already a big sales winner. Prospects look good for long-awaited "LH" models due later this fall, namely the Dodge Intrepid, Eagle Vision and Chrysler Concord.

"I plan to buy an LH myself, since it's positioned in price against Ford Taurus, but has interior room and features of cars $7,000 more expensive," says Glantz, noting Chrysler has a long list of other new models to debut the next several years.

Ford Motor Co., a strong pick of Alexandre and Glantz, is ranked above-average by Phillippi.

"Ford is the strongest car company, with excellent management and five of the country's 10 best-selling vehicles," says Alexandre. "A British economic recovery would certainly help its European sales."

General Motors Corp. stock is suggested by Glantz for longer-term investors. Phillippi believes it will do better than the overall market, but Alexandre would be interested only if shares dropped in price.

"There are still too many power centers in GM management and the company remains a bit off-track," says Alexandre.

A $3 dividend by 1994 for both GM and Ford is predicted by Glantz.

Among suppliers, Alexandre recommends Federal-Mogul in the bearings and seals aftermarket; Intermet Corp., a foundry that's a big supplier to Ford; Masco Industries in engine and drive-train components; and Superior Industries International in stylized aluminum wheels.

He also likes Standard Products in rubber and plastic trim components; Simpson Industries in machined metal parts; and Magna International in interior and exterior trim and body components.

A supplier suggested by Phillippi is Automotive Industries Holding Inc., a plastic interior trim maker for a number of carmakers.

The company is acquisition-minded and might buy other suppliers.

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