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3 cracking auto stocks for your shortlist

Makers of OEM parts for the auto industry often suffer from slim gross margins due to the purchasing power of the major car manufacturers. The following three companies have avoided this pitfall by focusing primarily on aftermarket parts and in one case also targeting motorsport teams.

Bapcor Ltd (ASX: BAP) is a leading distributor of aftermarket parts in Australia and New Zealand. The company is executing well on its multi-faceted strategy of growing its product range, expanding its store footprint and moving closer to both the manufacturer and consumer. The business enjoys network effects as its supplier and customer bases grow.

PWR Holdings Ltd (ASX: PWH) manufactures customised aluminium cooling products mainly for the motorsport and performance cars markets. It has recently embarked on a $10 million capital expenditure program to alleviate capacity constraints caused by its full orderbook. PWR boasts many Formula 1 teams as customers which is testament to its world class research and development capabilities.

ARB Corporation Limited (ASX: ARB) makes and distributes accessories for the 4WD market. The company is rapidly growing overseas sales which still only make up 27.7% of total revenue and so appears to have a large runway of growth ahead of it. ARB is a trusted quality brand with an extensive and growing product range.

Management is crucial to the success of any company and both ARB and Bapcor have leaders who have delivered excellent shareholder returns over a number of years.

PWR’s performance has been mixed since it listed in 2015 but unfavourable currency movements are partly to blame and outside of management’s control.

High insider ownership demonstrates that the interests of shareholders and directors are firmly aligned although the converse is not always true. The boards of ARB and PWR are major shareholders in their businesses with combined ownerships of 12.8% and 38.6% respectively, whereas Bapcor’s board collectively owns less than 1% of the company.

PWR earns comfortably higher gross margins than either ARB or Bapcor thanks to the hitech and specialist nature of its products. The flip side to this is that it can only really ever compete at the premium end of the market which along with its sole focus on cooling products limits growth opportunities.

The car industry is cyclical as it depends on the discretion of consumers, but both PWR and Bapcor are protected from this to different degrees.

Unlike consumers, motorsport teams will probably not cut back much during a recession and Bapcor mainly sells parts that are essential to the running of a car. You can’t put off getting your car fixed in the same way as you can buying a new one.

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Motley Fool contributor Matthew Brazier has no position in any of the stocks mentioned. You can find Matt on Twitter @MattBrazier2

The Motley Fool Australia owns shares of and has recommended Bapcor. The Motley Fool Australia has recommended ARB Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.