The global car industry is currently taking a hit because of a huge semiconductor shortage that’s slamming the brakes on production volumes. Today, the Society of Motor Manufacturers and Traders announced that car output in the UK had slumped to its worst June result, a near-70-year low (excluding coronavirus-hit June 2020) amid staff shortages and a lack of microchips. This is damaging the near-term outlook for a number of UK shares.
Supply chains have been whacked by a perfect storm. Add Covid-19-related travel restrictions to Brexit-linked trade turbulence, and mix with a mass shortage of shipping containers. This broad range of issues means it’s tricky to predict when production will return to normal levels.
One of the best cheap stocks to buy?
Naturally, these production problems are problematic for parts manufacturers alongside the carbuilders themselves. Take TI Fluid Systems (LSE: TIGS), for example. This UK share makes components that store, carry and deliver fluids inside vehicles. Revenues here rose almost 10% in the first quarter as light vehicle production recovered from the disruption of early 2020. But it’s possible that this year’s hoped-for bounceback could disappoint as the supply crunch continues.
This didn’t discourage me from buying TI Fluid Systems shares back in May though. This is because I thought it looked like one of the best cheap stocks to buy at the time. It traded (and still does trade) on a forward price-to-earnings growth (PEG) ratio of 0.1, well below the benchmark of 1 that suggests a stock could be undervalued by the market.
A UK share to ride the EV craze
It’s also because I buy UK shares based on what a company’s profits outlook is like over the long term. I look to snap up stocks with the aim of holding them for a decade, or more. So the prospect of some near-term, supply-chain turbulence didn’t put me off. Instead, I was attracted to buy TI Fluid Systems as I think earnings could soar as the electric vehicle (EV) revolution gathers pace.
This is because EVs require much higher loadings of fluid-carrying components than conventional combustion-engine-powered vehicles. And sales of these low-carbon vehicles are predicted to fly over the coming decade. That will be helped further as battery costs topple, and governments continue to offer purchase incentive schemes in a bid to meet climate targets.
The International Energy Agency, for example, thinks there’ll be 145m EVs rolling along the world’s highways by 2030. That’s an enormous lift from the roughly 10m that existed at the end of last year. And encouragingly, a number of major manufacturers have given TI Fluid Systems and its tech the thumbs up in this fast-growing arena.
The UK share has signed to supply systems for Volkswagen’s ID.3 and ID.4 models, for example. It also continues to win contracts to make parts across a number of Hyundai’s EV ranges.
Royston Wild owns shares of TI Fluid Systems. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.