While ModernGraham supports the bottom-up approach to investing, many investors do utilize the top-down method, whereby an industry is selected before the company itself. With that in mind, this article will take a brief look at the best companies of the auto industry, selecting the most promising investment opportunities within the industry, and giving a broad look into the industry as a whole.
Out of the more than 560 companies reviewed by ModernGraham, 15 were identified as being closely related to the auto industry. Of those, only one is suitable for the Defensive Investor, four are suitable for the Enterprising Investor, and the remaining ten are considered speculative at this time. Excluding any extreme outliers, the average company was rated as being priced at 65.23% to its MG Value (estimated intrinsic value), with an average PEmg ratio of 21.13. The industry as a whole, therefore would appear to be undervalued, particularly in comparison to the market (see Mr. Market’s Mental State).
The Elite
The following companies have been rated as undervalued and suitable for either the Defensive Investor or the Enterprising Investor:
BorgWarner Inc. (BWA)
BorgWarner is not suitable for Defensive Investors but it does pass the initial requirements of the Enterprising Investor. The Defensive Investor is concerned with the insufficient earnings stability over the last ten years, the inconsistent dividend history, and the high PEmg and PB ratios, while the Enterprising Investor has no initial concerns. As a result, all Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.
When it comes to that valuation, it is critical to consider the company’s earnings history. In this case, it has grown its EPSmg (normalized earnings) from $1.24 in 2011 to an estimated $2.76 for 2015. This is a fairly strong level of demonstrated growth, and outpaces the market’s implied estimate for annual earnings growth of 4.91% over the next 7-10 years.
In recent years, the company’s actual growth in EPSmg has averaged nearly 25% annually, and while the ModernGraham valuation model reduces the actual growth to a more conservative figure when making an estimate, the model still returns an estimate of intrinsic value well above the current price, indicating that BorgWarner is significantly undervalued at the present time. (See the full valuation)
