Beyond the EV hype: 2 unstoppable stocks that can reward you for years

The car market is not the easiest to invest in. Car sales have historically tended to grow at a low, single-digit growth rate. As such, the modest valuations at which auto stocks often trade are sometimes a value trap.

The super surge in electric vehicle (EV) sales was supposed to change all that, but unfortunately, growth expectations have been dampened lately. That said, there are still good growth at a reasonable price (GARP) stocks available, including ON Semiconductor (ON 2.98%) and Autoliv (ALV 0.20%).

ON Semiconductor’s hot end markets

The semiconductor company’s management’s decision to focus the company on the automotive and industrial end markets makes perfect strategic sense. In the automotive industry, its power and sensing solutions are exposed to EVs and advanced driver assistance systems (ADAS), while its industrial sales focus on industrial automation, EV charging networks, 5G/cloud and energy infrastructure .

Short-term challenges

While these industries read like a checklist of hot long-term growth industries, most have faced difficult conditions this year. Indeed, ON Semiconductor had to cut growth expectations due to a single auto OEM cutting demand for silicon carbide chips in the fall.

Moreover, growth expectations in industrial automation have also taken a step back this year, as evidenced by Rockwell Automation lowering full-year sales guidance during the year. At the same time, Emerson Electric management announced softer-than-expected growth in factory automation on its recent earnings call.

Of course, ON Semiconductor’s management is well aware of the near-term challenges. CEO Hassane El-Khoury continues to talk about an “L-shaped” recovery in earnings, suggesting there won’t be a big rebound. Meanwhile, CFO Thad Trent believes underlying demand is better than implied by the company’s revenue growth “because there is inventory digestion going on. As that inventory is disposed of, we believe our revenue over time will grow again.”

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There are good reasons to believe Trent’s view. Rockwell and others talked about customers running out of inventory built up in previous years because of the supply chain crisis, which has lengthened equipment delivery times.

As such, ON Semiconductor is suffering from a slowdown in demand and an inventory correction. However, the good news is that it won’t last forever, and there’s no doubt that its end markets are poised for growth. At the same time, the hype around markets like EVs and industrial automation has probably been exaggerated; ON Semiconductor trades at less than 19 times the Wall Street analyst consensus for full-year earnings. That’s too cheap for a growth company whose earnings are likely to decline in 2024.

The reality of a slower pace of electric vehicle sales growth has caught up with valuations, and ON Semiconductor now looks like excellent value.

Autoliv is a value choice

If ON Semiconductor is at the rising end of GARP, Autoliv is closer to being reasonably priced. The company dominates the automotive passive safety market with a 47% global market share of airbags, a 45% market share of seat belts and a 40% market share of steering wheels. Together, this gives Autoliv a 45 percent market share in passive safety — a position that has grown from 27 percent in 1997.

This type of market share means that its growth depends on the growth of its light vehicle forecast (LVP) and its ability to increase its content per vehicle (CVP). As an example of what this means in practice, higher income developed markets have a CPV of $330, while low and middle income markets have a CPV of $200.

Unfortunately, higher car production growth in the latter means Autoliv’s CPV could be under pressure in the near term. Management states in its 10-K Securities and Exchange Commission filing: “Over the next three years, all LVP growth is expected to come in lower middle- and lower-income regions with lower CPV, resulting in a dilution of overall average CPV “.

Image source: Getty Images.

Is Autoliv stock a buy?

But here’s the problem: Over time, consumers in low- and middle-income countries will likely demand the same safety features as consumers in higher-income countries. Moreover, Autoliv has a track record of outperforming its end markets — growing 5% per year since 1997, compared to market growth of 2.8%. Given its equal relevance in internal combustion engine cars and electric vehicles, Autoliv is a company that can grow in any environment.

Additionally, the stock trades at just under 12 times full-year estimated earnings, and Wall Street expects $1.82 billion in free cash flow over the next three years, representing more than 22% of the company’s current market cap. the market. This is excellent value for a company with solid long-term growth prospects.