a blurb on car partshttps://research.tdwaterhouse.ca/research/public/Markets/NewsArticle/1314-L1N0AP4U7-1
BAY STREET-Canadian car parts suppliers set for high gear9 hours ago by Thomson Reuters
* Fuel economy push, new features help drive demand
* U.S. auto sales up 13.5 pct in 2012, still seen rising
* Good entry point for Canadian supplier stocks: BMO analyst
By Susan Taylor
TORONTO, Jan 27 (Reuters) - All systems are go for Canada's auto parts sector. A gradual economic recovery, pent-up demand for new cars and a push for more fuel-efficient components portend strong growth for the country's biggest suppliers.
The fortunes of Magna International Inc, Linamar Corp and Martinrea International Inc are tightly tied to the Detroit Three and the health of the U.S. vehicle market. The outlook for both is reason for optimism.
Auto sales in the United States, still Canada's most important parts market despite boom times in China and South America, rose 13.5 percent in 2012 to nearly 14.5 million vehicles. This year, U.S. sales will reach 15.3 million vehicles, estimates Polk, a Southfield, Michigan-based research firm.
Polk cites low interest rates, a healthier housing sector and a wave of new vehicles introduced by major automakers as reasons for the growth. Consumers are eager to trade in their worn-out vehicles after delaying purchases during tough times.
"They're facing the best decade in their history," said Dennis DesRosiers, an industry consultant in Richmond Hill, Ontario. "No later than two years from now, we're going to have a record level of production in North America, and if you produce record numbers of vehicles, you're going to have record (parts) supply."
The steady recovery by Ford Motor Co, General Motors Co and Fiat SpA's Chrysler from their recession-induced slump is just one factor that suggests better times lie ahead.
As part of the Detroit Three's restructuring, supplier lists are being reduced by up to half, giving survivors a bigger piece of the pie, said BMO Capital Markets auto-parts analyst Peter Sklar. Further buoying Canadian suppliers is growing demand for global parts supply as automakers increasingly build vehicles on shared platforms to cut costs and use common parts.
"We think this is a good entry point for investors, in terms of valuation," he said. "They're at the low end of the range of where they're going to trade. For this year, for 2013, we think they're all going to have good earnings growth, so the stocks are going to go up."
In the last market cycle, torpedoed by the 2008-09 auto sector meltdown, Canadian parts suppliers generally traded at 4 to 6 times enterprise value to EBITDA (earnings before interest, taxes, depreciation, and amortization), Sklar said.
He forecasts valuations of 5 to 7 times that ratio. But Magna is now trading at about 5 times trailing EBITDA, Martinrea 5.2 times, Linamar 5.9 times, with smaller Exco Technologies Ltd at 5.2 times, he said.
Canadian supplier stocks are also cheaper than those of blue-chip U.S. rivals such as Johnson Controls Inc and BorgWarner Inc, Sklar said.
CUTTING-EDGE TECHNOLOGY
To capitalize on favorable conditions, the country's biggest suppliers must develop cutting-edge components, experts say.
Tougher fuel economy standards and a hyper-competitive auto market that is hungry for consumer-appealing electronics will require advanced parts, said Steve Rodgers, president of the Automotive Parts Manufacturers' Association.
"It's going to be absolutely crucial for them to continue to drive their R&D capabilities," he said in a phone interview from the recent Detroit auto show.
Fuel efficiency standards for U.S. cars and light trucks will soar to 54.5 miles a gallon in 2025, building on a rule raising fuel economy to 35.5 mpg for 2011 to 2016 model year vehicles.
That is "changing a lot of directions in technology," Rodgers said. Alongside increased interest in diesel systems, there is a push for advances ranging from lighter, alternative and composite materials to higher-speed transmissions, he said.
Ford, whose F-150 pickup is the best-selling vehicle in the United States, recently gave a sneak peek at its lighter, more fuel-thrifty truck. A new turbocharged engine and a more aerodynamic grill and wheels will help wring more miles per gallon.
Canada recently committed C$250 million ($250 million) to an extended auto R&D fund, matching the money in its initial 2008 program, but critics say that's insufficient to draw new assembly plants, the lifeline of parts suppliers.
Tony Faria, an auto industry expert at the University of Windsor in Ontario, argues such subsidies are imperative. Even if the funds don't lure new plants, they help germinate research and technology crucial to existing manufacturing and suppliers.
CHINA ASSEMBLY HOT SPOT
To be sure, Canada's top suppliers must also keep opening plants close to automakers that are expanding in hot-house markets outside North America.
Magna, one of the world's largest parts suppliers, had 305 manufacturing plants in 27 countries as of last quarter.
"If you're going to be a major player in the auto parts industry, you've got to be where production is occurring," Faria said. "For the last 10 years now, we've seen the bulk of new vehicle assembly going to China, India, Brazil, Russia."
Fully 50 percent of new auto assembly investment went to China in the last two years, he said.
China, the world's biggest auto market, is expanding its reach. Shareholders of Wescast Industries Inc vote Feb 21 on a drawn-out C$145.6-million takeover bid by China's Sichuan Bohong Industry Co Ltd.