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The original equipment auto parts industry had a good year in 1998 with a high production level in the light vehicle sector in North America, but the industry is still cyclical and economic growth in 1999 is expected to be slower. The Western European and North American markets are still the largest for the industry, but they have matured, and many suppliers are expanding their product lines. Auto parts stocks are not timely for 1999, but several have potential for the next three to five years.

Lower domestic car sales in the 1990s have had a negative impact on automobile parts industry earnings. American suppliers with European exposure will show better results, as will those who have contracts with Japanese manufacturers who have moved operations to the US. These stocks have underperformed the market and several have attractive prices for long-term gains. Companies with Japanese exposure will perform the best by 1998-2000.

Original auto equipment manufacturers (OEMs) are not expected to suffer too badly in 1995 as most of them are diversified, international markets are growing and cars in the US are getting older. However, rising interest rates and their impact on car-buying habits have forced OEM stock prices down, and some are trading near historically low relative profit earnings ratio levels. These represent a good investment opportunity.

The length of time that US citizens continue to hold on to their automobiles and the increased production of Japanese automobiles in the US will bode well for the automobile parts industry. There will be more automobile parts sold in the US as a result of these two trends. The stocks of many automobile parts manufacturers are not doing as well as expected due to the fact that many investors are concerned that the increase in interest rates will decrease the sales of new automobiles.

Automobile parts companies that supply their products to automobile manufacturers are expected to have good growth prospects through 1996. Part of the reason for this favorable forecast is the improvement of the industry's fundamentals. For example, suppliers are winning more contracts from Japanese automobile manufacturers that are based in the US because of the weakening of the US dollar against the Japanese yen. Other reasons for optimism are detailed.

The stocks of automotive parts manufacturers have traded at high earnings multiples buoyed by strong sales of automobiles. The high price/earnings ratios will decline as the automotive growth cycle moves forward. The stock price performance for this industry sector in 1994 is not expected to repeat the levels set in 1993. Domestic automotive parts suppliers are expected to benefit from the high value of the Japanese yen.

The stronger US economy would indicate that 1994 will be a good year for the original auto parts equipment industry, as the outlook is good for increased auto and light truck sales. Poor overseas economies will likely affect this market adversely, however, as auto makers in Japan and Europe are unlikely to see conditions improve radically in 1994. Investors should note that most stock prices have peaked long before earnings do, and stocks will likely decline in 1994 regardless of the industry's success.