It's earnings week for automotive parts companies, and the news on Friday is good ... but also bad. Over the last 18 hours, three of the biggest names in car parts have reported their results, with Magna International(NYSE: MGA) delivering a positive earnings surprise and American Axle & Manufacturing Holdings(NYSE: AXL) beating on sales, but Fox Factory(NASDAQ: FOXF) reporting an earnings miss Thursday night.
As of 10:15 a.m. ET Friday, Magna stock is up a strong 13.8%, and American Axle has gained a bit more at 14.2%. But Fox Factory shares are getting hammered -- they're down 40%.
Magna and American Axle deliver good news, but Fox Factory fails
Let's start with the good news. Friday morning, Magna International reported profits of $1.37 per share on third-quarter sales of $10.7 billion. That worked out to a 15% year-over-year increase in sales, but a 37% increase in profits.
Adding to the good news, management tightened the range of its 2023 revenue forecast. It now expects to collect between $42.1 billion and $43.1 billion for the year, and to report adjusted profits of between $1.55 per share and $1.65 per share.
If Magna's results were a clear win, though, American Axle's news was a bit more nuanced.
The United Auto Workers strike resulted in "downtime at key customers," and management noted that it faced its own "operational inefficiencies" as well. As such, third-quarter sales at American Axle grew only 1% year over year to $1.55 billion, while the rising cost of goods sold (up 4%) ate deeply into profit margins. On the bottom line, American Axle flipped from a profit in the prior-year quarter to a $0.15 per share loss this time around -- worse than expected.
On the other hand, though, American Axle did exceed analyst revenue projections for the third quarter. What's more, with the United Auto Workers strike now in the rear-view mirror, American Axle's guidance for the rest of 2023 was surprisingly good. Management thinks sales might be as strong as $6.1 billion for the full year, and will definitely exceed $6 billion. (Wall Street expected American Axle to fall short of that target.) Moreover, American Axle reported positive free cash flow in Q3, and forecasts it will remain free-cash-flow positive for the year, generating somewhere between $200 million and $215 million in cash profits this year.
The same cannot be said for Fox Factory. Reporting third-quarter sales of only $331.1 million and $0.83 per share in net profits, it missed expectations on both the top and bottom lines. Hurt badly by the effects of the autoworkers' strike, Fox saw a 19% slide in sales year over year -- and a 31% decline in per-share profits.
Worse, this manufacturer of suspension products for everything from bicycles to motorcycles to trucks warned that sales through the end of this year will fall short of Wall Street's expectations. Street analysts had been forecasting that Fox Factory would generate $1.65 billion in sales -- but management says $1.45 billion is more likely. Moreover, the company is predicting only $4.20 per share to $4.45 per share in adjusted profits.
Analysts on average had been anticipating $4.95 per share -- and given that Fox isn't guiding for that number, investors are selling off the stock.
Which of these auto parts companies are worth buying?
Long story short, investors in the auto parts sector Friday are being presented with clearly great numbers at Magna International, sorta-kinda good news at American Axle, and a pretty poor performance by Fox Factory.
On the one hand, this actually makes the decision on what to do next clear: Buy Magna International, which is selling for only about 14 times earnings, but is predicted to grow its earnings at 24% annually over the next five years (and pays a respectable 3.8% dividend yield to boot). Magna's doing a much better job of growing its business than American Axle is.
On the other hand, I wouldn't count Fox Factory out just yet.
True, its Q3 wasn't much to look at. But with a market cap that just got cut to around $2.2 billion, only about $100 million in net debt, and about $215 million in trailing free cash flow, Fox Factory stock today only costs about 10 times free cash flow. That's actually a bargain given that analysts polled by S&P Global Market Intelligence forecast Fox will get past this slump and grow earnings at a rate of close to 13% annually over the next five years.
Surprising as this may sound, I actually think there might be more upside potential in Fox Factory after its sell-off than in Magna International after its stock price surge Friday.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Magna International. The Motley Fool has a disclosure policy.
