If you want to dip your toe in the stock market and have $5,000 to invest, buying stocks you can hold for a long time makes sense. Moreover, the stocks you buy will need to be in relatively safe businesses. Heating, ventilation, and air conditioning equipment (HVAC) and parts company Watsco(NYSE: WSO) and leading auto safety company Autoliv(NYSE: ALV) fit these criteria. They are worth picking up for long-term investors.
Watsco can consolidate a fragmented market
HVAC distributor Watsco is the leading player in a highly fragmented market. The company built its position (it's double the size of its nearest competitor by revenue) by following its "buy-and-build" strategy. This entails expanding geographically by acquiring smaller distributors and bringing them into the Watsco fold. It's a highly successful strategy because there are many benefits from scale, which the newly acquired distributor can benefit from.
These benefits include greater parts availability and being part of Watsco's extensive network. In addition, Watsco has digital technologies (mobile apps, e-commerce sites, and digitized product information) that make it easier for contractors to order equipment -- a significant plus when customers are anxious to repair HVAC systems quickly.
As such, Watsco can grow via a combination of the expanding installed base of HVAC equipment in the U.S. and its acquisition strategy, which implies more coverage of that installed base. Meanwhile, end demand for HVAC parts will remain solid if users want to maintain equipment.
Watsco's operating income has grown at a 19% compound annual growth rate (CAGR) since 1989, and its dividend has grown at a 21% CAGR over the same period. Having navigated a significant product transition in 2023, the company looks set to grow for many years to come.
Autoliv
The U.S.-listed Swedish company Autoliv is all about safety. It's a safe stock to invest in, and it's a leader in passive safety systems for the automotive industry. In plain English, that means airbags, steering wheels, and seatbelts. Autoliv has dominant market positions in all three product lines, with a 44% global market share in airbags, a 37% global market share in steering wheels, and a 45% share in seatbelts.
While it's fair to say the automotive market (based on light vehicle production) is not a high-growth market, Autoliv has a growth opportunity from increasing content per vehicle and growing market share and pricing. Since 1997, light vehicle production has grown at a 1.6% CAGR, giving Autoliv's management the confidence to estimate 1% to 2% growth from increased light vehicle production.
On top of that, Autoliv can increase content per vehicle due to the trend toward higher-value steering wheels and increased airbag content in vehicles -- for example, side airbags, knee airbags, and front center airbags. Here, again, management sees a growth contribution of 1% to 2% annually. Finally, its mobility safety solutions (MSS) can add growth by expanding its markets beyond light vehicles into areas like bicycle and e-bike helmets, with airbag technology and motorcycle safety solutions such as cutoff switches.
Image source: Getty Images.
Ultimately, Autoliv's aiming for 4% to 6% organic growth over the long term, and to increase its operating profit margin from 8.5% to 9% in 2023 to 12% over time. The margin expansion is likely to come from ongoing investment in automation, consolidation of manufacturing into lower-cost countries, and price increases. Purely by way of example, the midpoint of the growth and margin expansion aims would increase operating profit by 70% in five years.
With the auto market moving toward higher-priced hybrid and electric vehicles in the developed world and increased safety requirements in the developing world, Autoliv has a good opportunity to hit its medium-term growth opportunities.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Watsco. The Motley Fool has a disclosure policy.
