The stock market witnessed turbulence last year amid high inflation and rising interest rates. Although inflation has fallen considerably from its 9.1% peak in June last year, it still remains high. The Fed will likely keep raising interest rates this year, fuelling concerns of a recession this year.
During times of macroeconomic uncertainty, investors must look for stocks with strong fundamentals and solid long term growth prospects available at a cheap valuation. To that end, investors can look to buy fundamentally strong value stocks BorgWarner Inc. (BWA), Lear Corporation (LEA), and Hyster-Yale Materials Handling, Inc. (HY) that might benefit investors in the long run.
Before diving deeper into the fundamentals of these stocks, let’s discuss why it could be wise to buy value stocks now.
The consumer price index (CPI) data for March showed consumer prices rose 5% on an annual basis and 0.1% sequentially. However, the core CPI, which excludes food and energy items, rose 0.4% sequentially and 5.6% year-over-year. In addition, the U.S. economy added 236,000 jobs in March, indicating strong job growth.
Minutes from the Fed’s March meeting show that the staff believes there could be a mild recession this year. San Francisco Fed President Mary Daly said, “While the full impact of this policy tightening is still making its way through the system, the strength of the economy and the elevated readings on inflation suggest that there is more work to do.”
With tightening bank lending and further interest rate hikes, the likelihood of a recession looks high. Value stocks have historically outperformed growth stocks when interest rates are high. Investors’ interest in value stocks is evident from the Vanguard Value ETF’s (VTV) 9.9% returns over the past six months.
Amid this backdrop, fundamentally strong value stocks BWA, LEA, and HY could be strategic investments for investors in the long run.
BorgWarner Inc. (BWA)
BWA provides solutions for combustion, hybrid, and electric vehicles worldwide. The company operates through four segments: Air Management, E-Propulsion & Drivetrain, Fuel Injection, and Aftermarket.
On March 1, 2023, BWA announced the completion of its acquisition of Hubei Surpass Sun Electric's (SSE's) Electric Vehicle Charging Solution, Smart Grid and Smart Energy businesses. The acquisition marks an important move for BWA’s Asian electrification business and is expected to complement the company's existing charging footprint in Europe and North America.
BWA’s revenue grew at a CAGR of 15.8% over the past three years. Its EBITDA grew at a CAGR of 10.9% over the past three years. Moreover, its net income grew at a CAGR of 8.2% over the past three years.
In terms of forward non-GAAP P/E, BWA’s 9.96x is 28.9% lower than the 14x industry average. Its 0.86x forward EV/Sales is 23.6% lower than the industry average of 1.12x. Likewise, its 5.99x forward EV/EBITDA is 36.6% lower than the industry average of 9.44x.
BWA’s net sales increased 12.4% year-over-year for the fourth quarter ended December 31, 2022, to $4.11 billion. The company’s gross profit increased 33.3% year-over-year to $833 million. Moreover, its adjusted EPS came in at $1.26, representing a 15.9% from the year-ago period.
BWA’s EPS and revenue for the quarter ended March 31, 2023, is expected to increase 5% and 6.7% year-over-year to $1.10 and $4.13 billion, respectively. It has a creditable earnings surprise history, surpassing its consensus EPS estimates in each of the trailing four quarters. Over the past nine months, the stock has gained 43.8% to close the last trading session at $48.81.
BWA’s POWR Ratings reflect its positive outlook. It has an overall rating of A, which equates to a Strong Buy. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #5 out of 60 stocks in the Auto Parts industry. In addition, it has an A grade for Growth and a B for Value, Momentum, and Quality.
Click here to see the other ratings of BWA for Stability and Sentiment.
Lear Corporation (LEA)
LEA designs, develops, engineers, manufactures, assembles, and supplies automotive seating, and electrical distribution systems, and related components for automotive original equipment manufacturers worldwide. It operates through two segments, Seating and E-Systems.
In terms of forward non-GAAP P/E, LEA’s 12.45x is 11.1% lower than the 14x industry average. Its 0.47x forward EV/Sales is 58.5% lower than the industry average of 1.12x. Likewise, its 6.42x forward EV/EBITDA is 31.9% lower than the 9.44x industry average.
LEA’s revenue grew at a CAGR of 1.8% over the past three years. Its total assets grew at a CAGR of 2.8% during the same time period.
LEA’s net sales increased 10.1% year-over-year to $5.37 billion for the fourth quarter that ended December 31, 2022. The company’s adjusted net income attributable to LEA increased 127.6% year-over-year to $167.50 million. Its adjusted EPS came in at $2.81, representing a 130.3% increase from the prior-year quarter.
LEA’s EPS and revenue for the quarter ended March 31, 2023, is expected to increase 35% and 6.7% year-over-year to $2.43 and $5.56 billion, respectively. The company has an impressive earnings surprise history, surpassing the consensus EPS estimates in each of the trailing four quarters. The stock has gained 8.5% year-to-date to close the last trading session at $134.60.
LEA’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system.
It is ranked #16 in the same industry. The stock has an A grade for Growth and a B for Value and Momentum. In total, we rate LEA on eight different levels. Beyond what we stated above, we have also given LEA grades for Stability, Sentiment, and Quality. Get all LEA ratings here.
Hyster-Yale Materials Handling, Inc. (HY)
HY designs, engineers, manufactures, sells, and services a line of lift trucks, attachments, and aftermarket parts worldwide. The company manufactures components, such as frames, masts, and transmissions; and assembles lift trucks.
On March 21, 2023, Yale Lift Truck Technologies announced the expanded availability of Yale Reliant, the company’s advanced operator assist solution, now available on 13 additional Yale lift truck models.
Yale’s Director of Technology Solutions, Nic Temple, said that while the company was breaking new ground by making the technology available on a broader range of lift truck types, operator assists systems are still relatively new.
HY’s revenue grew at a CAGR of 2.5% over the past three years. Its total assets grew at a CAGR of 3.1% over the past three years.
In terms of forward EV/Sales, HY’s 0.37x is 77.1% lower than the 1.62x industry average. Its 0.22x forward Price/Sales is 82.9% lower than the industry average of 1.31x.
HY’s revenues increased 18.7% year-over-year for the fourth quarter ended December 31, 2022, to $985.20 million. The company’s gross profit increased 131% year-over-year to $146.70 million. Its net income attributable to stockholders came in at $7.60 million, compared to a net loss of $103.30 million in the prior-year quarter.
Additionally, its EPS came in at $0.44, compared to a loss per share of $6.14 in the year-ago period.
HY’s EPS for fiscal 2024 is expected to increase 27% year-over-year to $2.76. Its revenue for the quarter ended March 31, 2023, is expected to increase 13.8% year-over-year to $941.59 million. The stock has gained 100.5% year-to-date to close the last trading session at $50.74.
HY’s POWR Ratings reflect strong prospects. The stock has an overall rating of B, equating to a Buy in our proprietary rating system.
It is ranked #15 in the same industry. The stock has an A grade for Growth and Sentiment and a B for Value and Momentum. We have also given HY grades for Stability and Quality. Get all the HY ratings here.
What To Do Next?
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What gives these stocks the right stuff to become big winners, even in this brutal stock market?
First, because they are all low priced companies with the most upside potential in today’s volatile markets.
But even more important, is that they are all top Buy rated stocks according to our coveted POWR Ratings system and they excel in key areas of growth, sentiment and momentum.
Click below now to see these 3 exciting stocks which could double or more in the year ahead.
BWA shares were trading at $48.59 per share on Tuesday afternoon, up $0.21 (+0.43%). Year-to-date, BWA has gained 21.13%, versus a 8.61% rise in the benchmark S&P 500 index during the same period.
About the Author: Malaika Alphonsus
Malaika's passion for writing and interest in financial markets led her to pursue a career in investment research. With a degree in Economics and Psychology, she intends to assist investors in making informed investment decisions.
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