Competition in the auto-technology space is intensifying with a slew of big announcements over the past few weeks. From new products to strategic tie ups and from affordable offerings to high-profile EV IPOs, the recent moves have kept industry watchers busy. For investors, these swift and snowballing developments herald greater push for green mobility initiatives representing faster tech innovation and new investment opportunities.
Fortunately, there are ways to play the auto tech themes without buying frothy, overpriced stocks. One way is through companies that supply auto parts and electronic components to electric and autonomous vehicles. The explosive adoption of zero-emission mobility and self-driving technology creates a long growth runway for the following stocks that are well positioned to benefit from these trends.
They also provide a relatively cheaper way to participate in the EV production ramp up as auto industry recovers from the coronavirus pandemic and shutdown.
| TE Connectivity Ltd | |
| Ticker | TEL |
| Current yield: | 1.99% |
| Forward P/E: | 18.55 |
| Price | $95.22 |
| Fair value: | $87 |
| Value | Fairly valued |
| Moat | Narrow |
| Moat Trend | Stable |
| Star rating | *** |
| Data as of Sept 23, 2020 | |
A leader in the global connectors and sensors industry, TE Connectivity (TEL) manufactures and designs products that connect and protect the flow of power and data inside millions of products used by consumers and industries, particularly in mission-critical applications that face harsh environments and require unwavering reliability. The company operates in three segments: transportation, industrial, and communications.
TE is well positioned for steady growth and profitability over the next decade, says a Morningstar equity report, attributing the cheery outlook to secular and technological trends fuelling increased connectivity, emissions, and efficiency standards. “TE Connectivity’s brightest prospects are a function of increased content in the global automotive market,” the report says, highlighting that “organic sales should keep up with their respective geographic markets, but content gains in automotive and commercial transport markets should allow the firm to outpace global production.”
TE Connectivity’s narrow moat is underpinned by its stable competitive position as customers face significant switching costs in attempting to go for competitors’ sensor and interconnect products. “The switching costs and global technological tailwinds will enable the firm to retain existing customers and expand market share in several applications in major end-markets, helping the firm generate returns above its cost of capital over the next decade,” says Morningstar sector director Brian Colello, who appraises the stock’s fair value to be US$87.
| Sensata Technologies Holding PLC | ||
| Ticker | ST | |
| Current yield: | - | |
| Forward P/E: | 14.64 | |
| Price | $41.94 | |
| Fair value: | $50 | |
| Value | 19% discount | |
| Moat | Narrow | |
| Moat Trend | Stable | |
| Star rating | *** | |
| Data as of Sept 23, 2020 | ||
A leading supplier of mission-critical sensors and controls, Sensata Technologies (ST) makes sensors for temperature, pressure, speed, and positioning, among other items.
The firm’s offerings are closely attuned to secular and technological trends in the automotive industry which positions the company for solid growth and profitability. Sensata boasts significant market share in key components for automotive, aerospace, and heavy-vehicle markets which create switching costs and enable the firm to retain its significant market share in several applications in major end markets, says a Morningstar equity report.
“Safety and emissions regulations have already helped drive growth, and we expect China’s tire pressure monitoring standards to be a significant opportunity for Sensata,” the report says.
While the automotive market continues to drive the bulk of Sensata’s revenue, its share of the firm’s revenue has decreased (from 70% in 2013 to 59% in 2019). However, Colello stresses that “the trend toward electrification and autonomous vehicles should create new opportunities for Sensata to produce highly differentiated smart content for a variety of applications. We remain steadfast in our long-term thesis, as we believe content growth will allow Sensata to outpace its underlying markets, but are pleased with a quicker rebound than we expected in the automotive market,” says Colello, whose US$50 fair value for the stock implies sizeable upside.
| Amphenol Corp Class A | ||
| Ticker | APH | |
| Current yield: | 0.96% | |
| Forward P/E: | 25.84 | |
| Price | $103.83 | |
| Fair value: | $88 | |
| Value | 19% premium | |
| Moat | Narrow | |
| Moat Trend | Stable | |
| Star rating | ** | |
| Data as of Sept 23, 2020 | ||
Amphenol (APH) is a leading supplier of connectors and sensors products. The company designs thousands of products for industrial, automotive, networking, and consumer electronics.
Amphenol benefits from a number of trends including electrification, autonomous driving, industrial robotics, and data growth. “While the trend toward electrification and autonomous vehicles should open up long-term opportunities for Amphenol to produce integrated connector and sensor content for a variety of applications, they have already seen the benefits of increased connectivity demands,” says a Morningstar equity report.
While operating in a highly competitive market, Amphenol’s content growth story and switching costs “should result in high-single-digit revenue growth and increasing profitability, with returns on invested capital exceeding cost of capital for the next decade,” the report says.
The secular trends driving increased connectivity and improving efficiency standards will drive steady growth and profitability over the long term. “In particular, these trends will provide opportunities for significant content gains in automotive, commercial transportation, and aerospace and defense markets which will help maintain the firm’s historically strong growth,” says Colello, who pegs the stock’s fair value at US$88.
