Robert W. Baird recommended purchase of auto stocks. The brokerage's top ideas for auto stocks are: Gentex Corp. (GNTX) and Johnson Controls Inc. (JCI).
We believe auto sales will return to a 'trend' demand level over the next 2 to 4 years, helping support 5 percent to 6 percent annualized production growth in North America. Importantly, supplier stocks do not typically peak until auto sales peak, lending support to continued outperformance across the group as sales levels continue to improve, said David Leiker, an analyst at Robert W. Baird.
Leiker said U.S. light vehicle sales of 12.5 million annualized units in December the best of 2010, third consecutive month above 12.0 million. Fourth-quarter rate of 12.3 million, the seventh consecutive quarter of improved demand, puts upward pressure on Leiker's current 2011 sales estimate of 12.4 million units.
Leiker said recent sales improvement largely driven by retail demand, an encouraging sign as consumers are driving sequential gains. Retail seasonally adjusted annual rate (SAAR) was also likely its highest of 2010, approaching 11.0 million unit level.
Leiker said easing credit conditions, greater consumer willingness to borrow, and high pent-up demand are likely all factors contributing to consumers reentering the market. In units, December sales increased 11 percent year-over-year and 31 percent sequentially.
According to Leiker, the three-month winners and losers in segments, original equipment manufacturers, and top 30 selling vehicles are:
Segments: Crossovers, Pickups, Vans
Original equipment manufacturers: Hyundai, Porsche, Suzuki
Top 30 selling vehicles: Ram, Grand Cherokee, Equinox
Segments: Large cars, Mid-size cars, Hybrids
Original equipment manufacturers: Volvo (Geely), Toyota, Daimler
Top 30 selling vehicles: Corolla, Camry, Malibu
Leiker said Gentex's near-term earnings driven by: mirror shipment demand exceeding end-market growth by 10 percent to 12 percent from greater penetration and share gains, revenue growing faster than shipments for the first time in history from higher content, and strong revenue growth and cost-cutting actions driving margins higher. Leiker looks for these drivers to remain through 2011.
For Johnson Controls, our primary attraction to the stock is the 'clean tech' opportunity to reduce the energy consumption of buildings around the world. Another key element is market share gains and end-market growth for batteries (lead acid, AGM and lithium-ion). The final earnings driver is the cyclical recovery in real estate construction and automotive demand, said Leiker.