Our fundamental outlook for the auto parts and
equipment sub-industry is positive, reflecting our
expectations for rising demand in the U.S. and
abroad, partly offset by increased raw material and
oil and gasoline prices and other operational
challenges.We believe profits in 2011 should benefit
from the higher U.S. and international vehicle
production. Some parts makers may be impacted by
production reductions in the second and third
quarters due to the Japan crisis.
We estimate an increase of 12.9% to 13.0 million
units in U.S. light vehicle sales for 2011 as well as
gains in most other regions. Rising prosperity in
emerging markets, led by China, should drive global
demand growth, partly offset by weaker
post-scrappage program European demand. While
U.S. demand will likely remain low by historical
standards, overall, we think higher volume in the
U.S. and abroad versus 2010 will help corporate
profits and cash flows. Positive factors we see in
the U.S. for 2011 include higher employment and
increased consumer confidence, pent-up consumer
and business demand and improving access to
credit for consumers. Cost cutting should also help
margins. However, rising gasoline prices could hurt
sales volume and vehicle sales mix. Also higher raw
material costs could pressure profit margins.
We forecast higher global vehicle production in
2011, with production trends varying by country. U.S.
new light vehicle production should increase.We
also project higher production in Asia, excluding
Japan, and expect improved U.S. automotive
replacement parts market demand.We think
demand for new commercial (heavy) trucks will rise
in 2011.
Many auto parts suppliers are increasing their
proportion of business done outside the U.S.
Emerging markets are becoming more attractive to
parts manufacturers due to lower labor costs for
manufacturing and engineering and/or due to
growing demand in local and regional markets.
Year to date through May 6, the S&P Auto Parts &
Equipment Index rose 4.3% versus a 6.8% gain for
the S&P 1500 Index. In 2010, the sub-industry index
surged 53.9% versus a 14.2% increase for the S&P
1500.
--Efraim Levy, CFA
I'm going to make my world a better place.
