The vehicle and parts industry is a highly cyclical area of the economy. As such, there aren’t that many names that have extensive dividend growth steaks. Finding undervalued stocks in this area is even more of a challenge with the market running at close to all-time highs.
However, there are still some names that appear to offer good value in addition to income. In this article, we will examine three such stocks.
First up is Allison Transmission Holdings, Inc. (ALSN, Financial), which is a designer and manufacturer of commercial and defense full-automatic transmissions. The company had its initial public offering in March of 2012 and has grown to a market capitalization of $3.7 billion today. The company generated revenue of $2.1 billion in 2020.
Allison Transmission has paid a dividend nearly the entirety of its existence in the public market, though year-over-year growth has been inconsistent at times. For example, following a few years of growth, the company maintained its dividend at the same rate from 2015 through 2019. When Allison Transmission has raised its dividend, it has been very aggressive in doing so. From 2012 to 2020, the dividend had a compound annual growth rate (CAGR) of more than 18%. The company most recently raised its dividend by 11.8% for the March 5, 2021 payment date.
The annualized dividend amounts to 76 cents. Wall Street analysts expect the company to earn $4.69 per share in 2021, giving the stock a projected payout ratio of just 16% for the year.
Shares of Allison Transmission yield 2.2% today, which compares very well to the average yield of 1.3% for the S&P 500 Index and the stock’s average yield of 1.6% since 2012, according to Value Line.
Shares of the company trade at just 7.4 times earnings estimates. With the stock averaging a price-earnings ratio of more than 14 since 2016, Allison Transmission looks inexpensive against its own historical valuation.
The GuruFocus Value chart also finds the stock to be undervalued.
With a current share price of $34.75 and a GF Value of $47.38, Allison Transmission has a price-to-GF-Value ratio of 0.73. Reaching the GF Value would result in a gain of more than 36%. Add in the dividend yield and total returns could reach even higher. Allison Transmission is rated as modestly undervalued by GuruFocus.
Next is BorgWarner Inc. (BWA, Financial), a leading supplier of highly engineered components and systems that are found in automotive powertrain applications. The company’s products are used in a wide variety of types of vehicles, including manual and automatic transmissions. BorgWarner has a market cap approaching $11 billion and annual sales of just over $10 billion.
BorgWarner began distributing dividends in 2013 and provided investors with small raises for the next five years. The dividend has been frozen at 68 cents for the year since 2018. BorgWarner is expected to earn $3.81 this year, implying a payout ratio of 18%.
The stock yields 1.4%, slightly lower than the five-year average yield of 1.6%.
With shares trading at $44.80, BorgWarner has a forward price-earnings ratio of 11.8. This is a discount to the stock’s 10-year average price-earnings ratio of 13.7.
The GuruFocus Value chart also sees upside in the stock.
BorgWarner has a GF Value of $50.12, implying a price-to-GF-Value ratio of 0.89. Reaching the GF Value would mean a nearly 12% return for the stock before the dividend is added in. The stock also receives a rating of modestly undervalued from GuruFocus.
Finally, we have Winnebago Industries, Inc. (WGO, Financial), a leading manufacturer of recreational vehicles. The company’s primary business is motor homes as Winnebago has nearly a fifth of the total market share for this product category. The company is valued at $2.3 billion and produced revenue of $3.6 billion in its most recent fiscal year.
Like the others discussed here, Winnebago’s dividend history is uneven. The company paid and raised its dividend heading into the Great Recession, before cutting it in 2009 and then eliminating it altogether in 2010. It wasn’t until 2015 that the dividend was reinstated, and it took until last year for the payments to match what it was prior to being cut.
That said, the company has raised its dividend for three consecutive years, including a 50% raise for the payment made this past Sept. 29.
Shareholders received 48 cents of dividends in fiscal year 2021 while the company brought in earnings per share of $8.54, giving Winnebago a very low payout ratio of just 6%. For fiscal year 2022, shareholders can expect to see 72 cents of dividends per share. Analyst expect the company to earn $9.49 per share during this period, giving the stock a projected payout ratio of 8%.
Winnebago yields 1.1%, which is close to its average yield of 1.2% since 2015.
With shares closing the most recent trading session at $67.87, the stock trades at just 7.2 times this fiscal year’s earnings estimates. Removing the average valuation from 2020 due to the pandemic, Winnebago has an average price-earnings ratio of just over 11 for the past five years. By this measure, the stock appears to be a good value.
Shares look to have potential upside as well according to the GuruFocus Value chart.
Winnebago has a GF Value of $83.71, giving shares a price-to-GF-Value ratio of 0.81. The stock could return more than 23% if the GF Value price target is achieved. The stock is rated as modestly undervalued.
The vehicle and parts industry can be very fickle, often making extreme moves up and down based on the state of the economy. It can be hard to find undervalued names in the industry in times of economic expansion that also offer some income. Allison Transmission, BorgWarner and Winnebago are three names that stand out in the industry due to trading at a steep discount relative to both their respective historical valuations as well as the GF Value.
Each name lacks a consistent dividend growth track record, but they do offer some income. This combined with the possibility of double-digit share price gains could make them an appealing investment option for those looking for exposure to this industry.