Canadian car parts suppliers set for high gear

Sun Jan 27, 2013 10:36am EST
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By Susan Taylor

TORONTO (Reuters) - All systems are go for Canada's auto parts sector. A gradual economic recovery, pent-up demand for new cars and a push for more fuel-efficient components portend strong growth for the country's biggest suppliers.

The fortunes of Magna International Inc (MG.TO: Quote), Linamar Corp LNR.TO and Martinrea International Inc (MRE.TO: Quote) are tightly tied to the Detroit Three and the health of the U.S. vehicle market. The outlook for both is reason for optimism.

Auto sales in the United States, still Canada's most important parts market despite boom times in China and South America, rose 13.5 percent in 2012 to nearly 14.5 million vehicles. This year, U.S. sales will reach 15.3 million vehicles, estimates Polk, a Southfield, Michigan-based research firm.

Polk cites low interest rates, a healthier housing sector and a wave of new vehicles introduced by major automakers as reasons for the growth. Consumers are eager to trade in their worn-out vehicles after delaying purchases during tough times.

"They're facing the best decade in their history," said Dennis DesRosiers, an industry consultant in Richmond Hill, Ontario. "No later than two years from now, we're going to have a record level of production in North America, and if you produce record numbers of vehicles, you're going to have record (parts) supply."

The steady recovery by Ford Motor Co (F.N: Quote), General Motors Co (GM.N: Quote) and Fiat SpA's Chrysler FIA.MI from their recession-induced slump is just one factor that suggests better times lie ahead.

As part of the Detroit Three's restructuring, supplier lists are being reduced by up to half, giving survivors a bigger piece of the pie, said BMO Capital Markets auto-parts analyst Peter Sklar. Further buoying Canadian suppliers is growing demand for global parts supply as automakers increasingly build vehicles on shared platforms to cut costs and use common parts.

"We think this is a good entry point for investors, in terms of valuation," he said. "They're at the low end of the range of where they're going to trade. For this year, for 2013, we think they're all going to have good earnings growth, so the stocks are going to go up."   Continued...