3 Small-Cap Growth Alternatives in the Auto Space
Oct 27th 2013 3:25PM
Updated Oct 27th 2013 3:26PM
With most of the hype going to the major car manufacturers, alternative plays are often overlooked by investors. However, companies that primarily engage in the selling/auctioning of new/used vehicles and related services are sometimes better investments.
Since most of these companies are relatively small compared to major car manufacturers, there is often substantially more room for growth. The fact that most investors, and the media, do not follow these stocks means there is also significantly less headline risk associated with them.
The growth argument
The main drivers of growth for car dealerships and vehicle auctioneers, as well as service/maintenance providers, are the continued trends toward increasing new and used car sales in the U.S. and the increasing lifespan of the average car and truck on American roads. Both trends have recently reached multi-year highs, and indicate that the automotive industry is primed for further growth.
Furthermore, these types of companies are also in a unique position to capitalize on the consumer's willingness to save money on major vehicle purchases, as well as with repair programs. While not flashy businesses, they make up a daily and vital part of the nation's automotive industry.
The following are three small-cap alternatives in the automotive industry that are worth considering for long-term growth investors: KAR Auction Services , Lithia Motors and Monro Muffler Brake .
KAR Auction Services
KAR Auction Services provides a wide range of vehicle auction services to consumers in North America. The company operates in four main business segments: ADESA, which includes wholesale car auctions; IAA, which includes salvage vehicle auctions; AFC, which provides capital funding to independent used-car dealers; and OPENLANE, an online vehicle remarketing auction company.
Founded in 2006 and publicly issued in late 2009, KAR Auction Services currently runs over 60 whole car auction locations, and over 160 salvage auction locations, with services auctions at more than 100 individual locations.
KAR is projected to grow revenue by 5.5% and earnings per share at an impressive 18% in 2014. With a market cap of only $4 billion, the company manages to generate revenue of over $2 billion per year. The stock also provides a dividend of $0.76, equal to a rather substantial yield of 2.5%, and trades at a reasonable forward P/E of 20.53.
Lithia Motors operates as a franchisee and retailer of new and used vehicles/replacement parts in the U.S. In addition to selling cars, the company also provides a suite of after-purchase services such as maintenance/warranty programs and financing/credit insurance. The company claims to be the ninth largest automotive retailer in the U.S.
It currently has over 90 store locations in 11 different states and carries over 27 unique brands of automobiles, including domestic names like Cadillac, Chevrolet, and Ford. It also sell imports like Mercedes Benz, BMW, and Audi.
After recently reporting results for the third quarter that handily beat analyst estimates on both the top and bottom lines, shares of Lithia Motors declined more than 10% last week. This decline was due to management's lower than expected guidance for 2014. However, this pullback presents investors with a rare buying opportunity, as the company is still expected to grow revenue 11.1% and EPS 12.8% next year. Additionally, the stock currently pays a dividend of $0.52, equal to a yield of 0.70%, and trades at a forward P/E of just 14.45.
Monro Muffler Brake
Monro Muffler Brake operates as a complete and discount auto care provider in the U.S. The company's core services include oil changes, brakes, shocks, struts, mufflers, and wheel alignments. Monro also offers consumers an extensive inventory of tires and tire-repair services to meet their needs.
In 50-plus years, the company has significantly expanded its store count to include more than 900 locations in 22 states. Currently, Monro serves all the Mid-Atlantic and New England states and portions of the Great Lakes, Midwest, and Southeast.
Out of all companies listed, Monro is projected the most robust revenue and EPS growth in 2014, at 12.1% and 31.9%, respectively. The company is also the smallest of the bunch, with a market capitalization of just $1.45 billion and only $179 million in debt. The stock pays a dividend of $0.44, equal to a yield of 0.90%, and trades at a forward P/E of 21.54.
Alternative, safer, better
All these companies are interesting because they allow investors to capitalize on positive trends regarding new and used car sales, and increasing vehicle age, while avoiding much of the risk associated with the automotive industry, such as new car production difficulties, and increasing government regulations.
More importantly, each of the three companies has substantial room for growth in domestic markets. The stocks have all recently corrected from yearly highs, and now trade at fair to cheap valuation levels. As such, they represent viable growth alternatives for investors looking into the automotive space.
The article 3 Small-Cap Growth Alternatives in the Auto Space originally appeared on Fool.com.Philip Saglimbeni has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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