These two stocks get very little publicity: Tenneco and Lithia Motors. Both trade with a 0.3 price-sales ratio, but both are poised for long-term success.
Tenneco is an original equipment maker for the auto industry with a long roster of top auto brands (i.e., Ford, Toyota, GM, Volvo, Daimler, BMW). It's also connected to auto parts retailers such as O’Reilly, Advanced and Napa, and big equipment makers like Caterpillar and John Deere.
The company is committed to “cleaner air, and smoother, quieter and safer transportation,” which has helped it grow into a $9 billion sales machine.
How much longer its clean engine technology will be dominant is anyone’s guess, but the company will continue to be lifted by the passage of stricter emission standards. More stringent regulations are now being phased on both sides of the Atlantic and in China, where pollution has become a serious problem. Through this decade-long process, Tenneco should increase profit margins and accelerate growth. In fact, by 2020, some analysts are projecting EPS north of $10 a share. At that level, the current price is a steal.
Lithia Motors (LAD, Financial)
Lithia Motors’ is a 60-year-old automotive retailer from Oregon. Its main advantage is being the only publicly traded company focused on rural markets.
In the last 12 months the company generated $207 million in net profit on $9.68 billion in sales. Since the housing bubble, the company is on a tear, increasing revenue from $1.7 billion and net income from a measly $9 million. You’re still paying 13 times forward earnings but considering where the overall market is, this might look like a bargain.
Lithia just acquired Downtown Los Angeles Auto Group (DTLA) as it looks to expand its presence in the import and luxury auto market. The acquisition is expected to add nearly $1 billion in revenues and 55 cents in share earnings on an annualized basis. So look for 2018 to be a stellar year on the EPS side. The company should also continue to add to book value, which is up 240% since 2008.
Conclusion
Whether or not autonomous cars populate the streets and countryside, the future will still be favorable for the manufactures, which will trickle down to the retailers and the suppliers. The industry as a whole has massive barriers to entry. Unlike the tech world where almost anyone who knows how to code can pick up a free Amazon AWS account and start a business, building the leading clean engine maker like Tenneco or a company that sells over $9 billion dollars worth of automobiles like Lithia is an arduous, time-consuming task with many pitfalls. To then turn a profit means all of the systems are in place, running extremely well. Considering the position each of these companies has in its respective markets, shareholders may see further growth in the share prices as well.
While Lithia has no serious guru ownership, Tenneco is owned by Mario Gabelli (Trades, Portfolio) with 1.3% of the shares, followed by Steve Cohen, Joel Greenblatt (Trades, Portfolio), and Jim Simons (Trades, Portfolio) with much smaller positions.
Disclosure: I am not long/short any stock mentioned in this article.
