Stock Quotes in this Article: AXL, GT, LEA, TRW

 NEW YORK (Stockpickr) -- Clint Eastwood really stepped in it this time. The pull-no-punches octogenarian waded into a firestorm by seemingly endorsing the revival of the U.S. auto industry in a Super Bowl halftime commercial. Clearly, the government’s rescue of GM (GM) and Chrysler -- along with a handful of auto parts suppliers -- can still cause quite an argument.

Yet with the controversy receding, investors can now focus on the important take away from that two-minute advertisement: Auto sales have bounced up off the lows, and should keep rising and rising into this middle of this decade. And while that would surely the prospects of Ford (F) and GM, there are a range of auto parts suppliers that are also selling on the cheap, and should also get a tangible lift from this rebounding industry.

To be sure, a debt-laden industry that is built to produce 16 million to 17 million units will hit deep financial distress if demand falls to 10 million. The auto makers and their suppliers saw share prices sink below $2 -- or in some instances wiped out completely in 2008 and early 2009. And though they’ve moved up sharply off of their lows, they remain quite inexpensive in the context of near-term profit results. The average stock in this table trades for around 9.5 times projected 2012 profits, and that average multiple falls to just 8.0 based on 2013 profit forecasts.

More important, the near-term valuations are the long-term trends. These auto parts suppliers have typically derived the large majority of their business from domestic auto makers. Yet foreign auto makers in Japan and Europe are starting to cut production in their countries and boost production here in the U.S. That opens the door for U.S.-based auto parts suppliers to expand their customer base.

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To be sure, it will be hard for this group to rally while investors anxiously watch the economic crisis unfurl in Europe. These auto parts suppliers have made major inroads into Europe which is a long-term positive, but creates a risk to near-term sales and profit forecasts.

Still, this industry is vastly healthier than it was a few years ago, as companies sport stronger balance sheets and lower operating costs. They’re quite profitable right now, and as long as U.S. industry volumes keep rising and Europe avoids a deeper slowdown, the stage is set for stunningly-high profits by mid-decade.

 

So what are the best bargains in the sector? Here's a look at four undervalued auto parts suppliers.

TRW Automotive Holdings

TRW Automotive TRW is aiming squarely at the two most important trends driving the auto industry: fuel efficiency and safety. The company was a pioneer in the development of airbags and is benefiting from a rising number of airbags being built into every new car.

On the fuel mileage front, the U.S. and Europe have established increasingly tighter standards, and auto makers are currently working with TRW’s latest fuel injection systems for models that will hit showrooms in 2013.

This is a company that was on the ropes in 2008, when long-term debt hit $2.6 billion. These days, that figure is closer to $500 million, allowing TRW to sharply boost spending on new products without running the risk of running out of money.

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Those investments may actually hurt profits in the near-term. The company is expected to show a year-over-year drop in profits when quarterly results are released later this week.

Analysts at Sterne Agee think profits will perk up starting this summer. According to them, "The investment for the new programs should begin to slow in the second half of 2012,” which should help “earnings per share to reach a record level in 2013.” The firm sees EPS hitting $7 next year, making shares a bargain below $42.

American Axle

American Axle (AXL) is highly exposed to pickup trucks, SUVs and smaller haulers, known as CUVs. Trucks and SUVs saw demand plunge to an even greater extent than cars, in large part to a sharp slump in the construction industry.

Demand for these vehicles is now rebounding at a solid clip, especially since many of these larger vehicles have seen major fuel efficiency gains. But demand will rise even higher when the construction industry gets back on its feet.

A major truck redesign from GM, known as the CMT900, should give a tangible boost to American Axle’s results. Trading at four times projected 2013 profits, shares could move up 40% from current levels and still trade for less than six times projected profits.

Worried about exposure to Europe? American Axle derives less than 10% sales form the Continent, among the smallest geographical exposure in the industry.

American Axle shows up on a recent list of Stocks in Bottoming Sectors Primed for a 2012 Bounce.

Lear

Lear (LEA) aims to show investors that the scary days of 2008 and 2009 are receding in the rear-view mirror. Even with the challenges in Europe along, Lear is so bullish on its ability to hold its own now and thrive in coming years that it’s loosening up the checkbook.

Instead of preserving its $1.1 billion in net cash for the next tough period, the company announced in January that it will hike capital spending around $300 million in 2012. That should help to sharply boost free cash flow in 2013 and beyond as those current investments bear fruit.

Lear is also looking to shrink the share count, hiking an existing $300 million share buyback program up to $700 million. That appears to be a wise move considering shares trade for less than four times trailing EBITDA.

Lear, one of John Paulson's holdings as of the most recently reported period, is one of the highest-yielding automotive stocks, with a current yield of 1.1%.

Goodyear Tire & Rubber

More cars and trucks on the road mean more demand for Goodyear Tire & Rubber's (GT) eponymously named tires. You can see the industry upswing in the company’s bottom line, as EPS surged from 50 cents in 2010 to likely more than $2 in 2011.

Analysts at Citigroup see EPS hitting nearly $3 by next year. “Following significant underperformance in the shares over the past 12 months, we believe the risk/reward of Goodyear may be poised to tilt favorably, as the stock appears out of favor,” note the analysts, with as $22 target price, which equates to almost 60% upside from current levels.

Goodyear, one of Appaloosa Management's holdings as of the most recently reported period, shows up on a list of 12 Stocks to Buy for 2012.

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