One of These 3 Auto Companies Is Set for Gains

With automakers such as Tesla, General Motors and Toyota filling the headlines, it's easy to ignore other large and potentially profitable players in the industry. Before deciding which of the many companies exposed to the auto sector to add to your portfolio, don't forget to see whether the following firms could be right for you. While not all these companies are automakers, they do play key roles in the industry, which is expected to boom along with the world's emerging markets.

Oshkosh needs further diversification

Specialty vehicle manufacturer Oshkosh has managed to secure major deals with the United States Army. It will need to continue booking those contracts if it wants to keep up profits, however. The company's current deal with the military, which is due to last for at least another year, is a major source of the company's revenue.

With a client as major as the Pentagon, however, the company needs to tread very carefully when dealing internationally. The wrong deal could likely tarnish its relationship with the U.S. Department of Defense. After all, a firm that is supplying a possible enemy with vehicles won't be favored in the next request for proposals. The company recently won a bid to supply 750 vehicles to the United Arab Emirates, so we will see whether that affects its domestic business.

About 60% of Oshkosh's annual sales are from defense, and the company will need to diversify further before I buy its shares. Despite the firm entering the concrete mixer, fire truck, and refuse vehicle businesses, relying on one client for 60% of revenue is potentially disastrous.

Paccar will profit from focus on assembly

Paccar manufactures, light-, medium- and heavy-duty trucks. It is one of the better diesel truck manufacturers to own, and also beats out many of its non-diesel rivals. This is because the company has cut out its manufacturing segment to focus solely on assembly. That will help improve its profit margins going forward because of fewer variable costs involved.

The company will also likely attract new customers because of its ability to innovate. For example, the firm's new engine doesn't use as much fuel when idling, which it says can save up to 8% of fuel use. Furthermore, the firm is adding hybrid vehicles that can save up to 30% of fuel.

These gas-saving technological advances are extremely important in securing new clients. With many companies using diesel engines in their daily operations, a slight reduction in the fuel consumption of those engines could save those major dollars. This is important since many firms are making the switch to natural gas due to the costs for diesel.

A report released in May by Energy Vision, titled "Tomorrow's Trucks: Leaving the Era of Oil Behind," shows that companies operating with diesel fuel are struggling with the costs. Some of these companies are now switching to natural gas, which has recently hit historic lows. As Paccar continues to hammer home its image of being an innovator, the firm could help prevent many of these firms from switching over.

Tata is faced with growing market but more competition

Tata Motors is an Indian automaker that also makes construction equipment, machine tools, and electric components for high-precision tooling. The company's line of personal vehicles could drive growth long into the future, but I am concerned that there is too much pressure from rivals like Mahindra MHID and Ashok-Leyland. This competition is eroding Tata's Indian vehicle market share, taking it from 65% in 2007 to 59% in 2012.

That doesn't necessarily mean that Tata's sales volume will decrease, however. The passenger vehicle market in India has grown by an average of 17% in each of the last five years, and Tata will be able to continually capitalize on that segment. Many of the drivers in India are only barely able to afford a vehicle, and Tata carries the world's cheapest and smallest car, the Nano. This could result in an enormous number of sales as brand awareness improves. In fact, sales are expected to increase by over 50% over the next three years.

The India-based company could benefit from an improving domestic road infrastructure and the developing middle class in India as well. The Indian commercial vehicle market is expected to double by 2016, according to The Economic Times. I see this as evidence that more people are likely to have the capital with which to buy vehicles within the next few years. The same article points out that rapid urbanization will also help fuel the push toward driving vehicles.

Rounding out the top pick

Oshkosh needs to continue diversifying if it is going to be secure enough for me to consider investing in its stock. Tata will potentially realize huge sales with its Nano as disposable income increases in India, but I see too much potential for competition that could take away those customers.

Of the three companies, I like Paccar the best. The firm has the potential to become the standard for fuel-efficiency among diesel vehicles, and that's a key point for many businesses that use diesel-fueled trucks.

With the American markets reaching new highs, investors and pundits alike are skeptical about future growth. They shouldn't be. Many global regions are still stuck in neutral, and their resurgence could result in windfall profits for select companies. A recent Motley Fool report, "3 Strong Buys for a Global Economic Recovery," outlines three companies that could take off when the global economy gains steam. Click here to read the full report!

The article One of These 3 Auto Companies Is Set for Gains originally appeared on Fool.com.

Phillip Woolgar has no position in any stocks mentioned. The Motley Fool recommends Paccar. The Motley Fool owns shares of Paccar. Try any of our Foolish newsletter services free for 30 days. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.