The automotive market isn't the easiest to invest in. Auto sales have historically tended to grow at a low-single-digit growth rate. As such, the lowly valuations that auto-related stocks often trade on are sometimes a value trap.
The super growth of electric vehicle (EV) sales was supposed to change all that, but unfortunately, growth expectations have been pared back lately. That said, there's still good growth at reasonable price (GARP) stocks available, including ON Semiconductor(NASDAQ: ON) and Autoliv(NYSE: ALV).
ON Semiconductor's hot end markets
The semiconductor company's management's decision to focus the company on the automotive and industrial end markets makes perfect strategic sense. Within the automotive industry, its power and sensing solutions are exposed to EV and advanced driver assistance systems (ADAS), while its industrial sales focus on industrial automation, EV charging networks, 5G/cloud, and energy infrastructure.
Near-term challenges
While these industries read off like a checklist of hot long-term growth industries, most have faced challenging conditions this year. Indeed, ON Semiconductor had to pare back growth expectations due to a single automotive original equipment manufacturer reducing demand for silicon carbide chips in the autumn.
Moreover, growth expectations in industrial automation have also taken a step back this year, as evidenced by Rockwell Automation lowering its full-year sales guidance through the year. At the same time, Emerson Electric management called out softer-than-expected factory automation growth on its recent earnings call.
Naturally, ON Semiconductor's management is well aware of the near-term challenges. CEO Hassane El-Khoury continues to talk of an "L-shape" recovery in revenue, implying there won't be a big bounce back. Meanwhile, CFO Thad Trent believes that underlying demand is better than implied by the company's revenue growth "as there's an inventory digestion going on. As that inventory is bled off, we think our revenue over time will increase again."
Image source: Getty Images.
There's good reason to believe Trent's view. Rockwell and others have talked about customers running down inventory built up during the previous years due to the supply chain crisis, which lengthened equipment lead times.
As such, ON Semiconductor is suffering from a slowdown in demand and an inventory correction. However, the good news is that it won't last forever, and there's little doubt that its end markets are primed for growth. At the same time, the hype around markets like EV and industrial automation has probably been overdone; ON Semiconductor trades on less than 19 times the Wall Street analyst consensus for full-year earnings. That's too cheap for a growth company whose earnings will likely trough in 2024.
The reality of a slower pace of growth in EV sales has caught up with valuations, and ON Semiconductor looks like an excellent value now.
Autoliv is a value choice
If ON Semiconductor is at the growth end of the GARP, Autoliv is closer to the reasonable price side. The company dominates the automotive passive safety market, with a 47% global market share in airbags, a 45% market share in seatbelts, and a 40% market share in steering wheels. Together, this gives Autoliv a 45% market share in passive safety -- a position that has risen from 27% in 1997.
That kind of market share means its growth depends on growth in light vehicle prediction (LVP) and its ability to increase its content per vehicle (CVP). As an example of what this means in practice, higher-income developed markets have a CPV of $330, while low- to medium-income markets have a CPV of $200.
Unfortunately, the higher car-production growth in the latter means Autoliv's CPV could come under pressure over the near term. Management states in its 10-K Securities and Exchange Commission filing, "In the next three years, all LVP growth is expected to come in medium- and low-income regions with lower CPV, leading to a dilution of the average global CPV."
Image source: Getty Images.
Is Autoliv stock a buy?
But here's the thing: Over time, low- and medium-income country consumers will likely demand the same safety features as higher-income country consumers. Moreover, Autoliv has a track record of outgrowing its end markets -- growing 5% per annum since 1997 compared to market growth of 2.8%. Given its equal relevance in internal combustion engine-powered automobiles and EVs, Autoliv is a company that can grow in any environment.
In addition, the stock trades on slightly less than 12 times estimated full-year earnings, and Wall Street expects $1.82 billion in free cash flow over the next three years, representing more than 22% of its current market cap. That's an excellent value for a company with solid long-term growth prospects.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Emerson Electric. The Motley Fool recommends ON Semiconductor. The Motley Fool has a disclosure policy.
