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Auto Sales Are Booming: Here Are the Stocks to Own

Canadian manufacturing sales increased much more than expected in August, driven by higher sales of motor vehicles and parts, which rose almost 10%. Vehicle sales in Canada are expected to hit a record in 2017.

It should come as no surprise then, that auto parts suppliers Magna International Inc. (TSX:MG)(NYSE:MGA) and Linamar Corporation (TSX:LNR) are once again hitting 52-week highs in trading.

Magna’s revenue growth continues to outpace the industry, and future growth will increasingly come from emerging markets and new technology offerings, as the company has been investing to increase its exposure to higher-growth markets.

On this note, Magna announced a joint venture with an automotive company in China to produce electric powertrain systems. This follows the company’s announcement earlier this year that it is teaming up with BMW and Intel Corp. to develop a self-driving system for the global vehicle marketplace by 2021.

In the latest quarter, the second quarter of 2017, revenue increased 2.6% to $9.68 billion, and earnings per share increased 5% to $1.48.

The current dividend yield on Magna shares is 2.09%, and the company continues to have a low debt balance sheet and the intention to buy back shares and increase its dividend in the near future.

Linamar differs from Magna in that it is not a pure auto parts supplier.

In an attempt to reduce the cyclicality of the business, Linamar entered the industrial segment, which is mostly made up of 100% owned Skyjack, an industrial company that manufactures access and material handling equipment such as scissors and boom lifts.

Linamar has also made efforts to diversify its auto parts business by increasing its product offering (with a focus on vertical integration), its geographic reach, and by attempting to get new customers for its existing products (energy and industrial OEMS).

The company has had more than 150 launches since 2014, representing more than $550 million of additional business, and has expanded its product offering to become increasingly vertically integrated.

Linamar has been outperforming on a consistent basis and maintains industry-leading margins.

In the second quarter of 2017, Linamar exceeded expectations once again, with a 6.6% increase in revenue and a 9.4% increase in EPS. Strong growth and strong margins characterized this quarter, as growth clearly also remains above industry levels.

In summary, these two auto parts companies are well-run, internationally diversified businesses that are forward looking and dedicated to remaining at the forefront of the industry by investing in new technologies and expanding their reach internationally.

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Fool contributor Karen Thomas does not own shares in any of the companies listed in this article. Magna is a recommendation of Stock Advisor Canada.

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