> DETROIT (Dow Jones) -- Delphi Automotive Systems Corp. (DPH) is the
> favorite
> stock in its forlorn group of auto-parts makers.
>
> Formerly a unit of General Motors Corp. (GM), Delphi went public in
> February
> and is "one of the cheaper stocks in a cheap group," Gary Lapidus, an
> analyst
> with Sanford C. Bernstein in New York, said in a recent research note.
>
> "We can't find anybody that is really saying they don't support Delphi,"
>
> Delphi chairman and chief executive, J.T. Battenberg III, told Dow Jones
>
> Newswires.
>
> A dozen analysts are telling investors to buy the stock, twice as many
> as
> three months ago. Delphi's "margins are improving and the balance sheet is
>
> strengthening," Lapidus said. The stock has been trading at 9.4 times
>
> estimated 1999 earnings, compared to an average of 11.5 times for other
> makers
> of auto parts. Analysts consider the whole auto-parts group undervalued.
>
> Delphi's initial public offering was a whopper - 100 million shares at
> $17
> each. The stock got as high as $22.25 a share in May, before GM spun off
>
> Delphi's remaining 452.5 million shares to GM shareholders. Many of the GM
>
> shareholders soon dumped their Delphi shares and the price slipped to
> $16.37.
> Lately it has been trading near $18.
>
> For a while, Delphi was "trading more shares than Ford Motor Co. (F) or
>
> General Motors most days," said Alan Dawes, Delphi's chief financial
> officer.
> About 90 million shares were traded in June. Dawes expects trading volume
> to
> settle down to about a million shares a day once Delphi shares "find a
> home."
> Selling by GM shareholders has depressed Delphi shares by "roughly 5% to
>
> 10%," said Ronald Tadross, an analyst with Prudential Securities in New
> York,
> in a research report. Tadross rates the stock a "strong buy." He said
> Delphi
> is popular among analysts because of its strong cash flow and low debt.
>
> Most other auto-parts stocks are down from their 52-week highs too,
>
> including Lear Corp. (LEA), Dana Corp. (DCN) and Magna International Inc.
>
> (MGA). The group has lost favor partly because the market is anticipating
> a
> downturn in auto sales, said John Daviduk, an analyst with Credit Suisse
> First
> Boston in New York.
>
> "The 'P' is coming down in anticipation of a decline in the 'E,"'
> Daviduk
> said. Auto parts stocks also are interest rate sensitive because the
> companies
> require heavy capital investments.
>
> Delphi's management has pledged to grow per share earnings 10% a year
> and
> plans to expand into the automotive aftermarket for replacement parts. The
>
> consensus estimate of analysts is for Delphi to earn $1.88 a share this
> year,
> on sales of $29 billion, according to First Call/Thomson Financial.
>
>
>
> Electronics And High-Tech Gadgets
>
>
>
> When it was part of GM, Delphi was the biggest parts maker for the
> biggest
> auto maker; GM still accounts for 80% of its sales. But now, as the
> biggest
> independent parts maker, Delphi stands to do more business with GM's
>
> competitors.
>
> About 45% of Delphi sales are for chassis, steering and engine products
> and
> 39% are from safety and electrical products. The other 16% is comes from
>
> electronics and mobile communications, where Delphi is a technological
> leader,
> with a slew of innovative products.
>
> Electronics will drive Delphi's growth, Battenberg said.
>
> Some of Delphi's high-tech gadgets already are on the road. Delphi's
> Traxxar
> stability system, which increases vehicle stability and control, is
> already
> used on some Cadillac cars and GM SUV models use. Land Rover Discovery now
>
> uses an adapted version of Delphi's Dynamic Body Control, a ride and
> handling
> product which provides greater stability over rough terrain.
>
> Other products are on the way. An upcoming Jaguar model will have
> Delphi's
> Forewarn adaptive cruise control which keeps a headway slows the vehicle
> if it
> detects an object that is too close. Delphi also will supply "several
> hundred
> thousand" E-steer electric power-steering systems to Fiat for its new
> Punto
> model, coming in 2000. Battenberg said a Delphi package that
> electronically
> opens sliding doors and rear liftgates on minivans will go into 2001
> models of
> an unnamed U.S. automaker.
>
> Delphi is developing on-board communications devices, including
> navigational
> and voice-recognition security systems and products that provide passenger
>
> entertainment or connectivity to homes and offices, all under its
> Communiport
> brand-name. Battenberg said Delphi can "provide the connectivity between
>
> satellites, the Internet and vehicle systems," a market segment that some
>
> analysts say will explode over the next five years.
>
> Analysts are recommending Delphi for reasons besides the price of the
> stock.
> "Being cheap is never a good enough reason to buy a stock, there has got
> to be
> a fundamental attraction," said John Casesa, an auto analyst with Merrill
>
> Lynch & Co. in New York.
>
> Other reasons: Delphi has good cash flow, little debt and is furiously
>
> booking new orders - $15 billion in the first-half of 1999. For an auto
>
> supplier, new orders mean business that won't materialize for three years,
> the
> standard lead-time required by automakers.
>
> The new business bookings mean that "at a minimum" Delphi "can replace
> the
> divested business with non-GM business and grow the earnings by managing
>
> costs," Battenberg said.
>
> Delphi's strong balance sheet positions it to make acquisitions, which
>
> increasingly is popular among parts makers which are trying to grow
> bigger.
>
>
> Labor Friction And A GM Hangover
>
>
>
> Two clouds mar the sunny outlook for Delphi. One is that 80% of its
> sales
> still come from GM, a horse that is at the back of the pack and staying
> there.
> Delphi is "GM Jr." to some industry watchers, too dependent on
> high-volume,
> low-profit orders from the stumbling automaker.
>
> Second, Delphi is the high-cost producer among U.S. parts makers. The
> 21% of
> Delphi's employees who are represented by the United Auto Workers union
> make
> about $45 an hour in wages and benefits. Most of Delphi's competitors,
> which
> aren't unionized, pay less.
>
> Strikes last year hurt Delphi's return on sales, or net income margin.
> It
> was about 1.5% in 1998, when Delphi was part of GM, and is on target to be
>
> about 3.6% in 1999, said Keith Stipp, a Delphi spokesman. The company's
>
> objective is to improve that return "each year until we reach our 5%
> target in
> 2002," Stipp said.
>
> Delphi is addressing its high costs through a "fix, sell and close
>
> strategy," Stipp said. It is fixing outdated plants to get productivity
>
> benefits; selling some which produce low-profit generic products; and
> closing
> others that are obsolete or unneeded.
>
> Casesa, the analyst at Merrill, said he would like to see more fixing,
>
> selling or closing of Delphi's weak businesses. But he doesn't expect that
>
> until after Delphi's contracts negotiations with the UAW this fall. A
> strike
> would whack earnings hard in the fourth quarter, typically the company's
>
> strongest because of changeovers to new car models.
>
> "For investors to make a lot of money in this stock, management must
>
> increase the focus of the business and deal aggressively with the
>
> underperforming businesses," Casesa said. Delphi products that aren't a
> good
> strategic fit or don't return their costs of capital handicap the
> company's
> growth opportunities, he said.
>
> "The longer it take to restructure the company into a lean competitive
>
> business," Casesa said, "the more time the competition will have to catch
> up
> to them in areas where they are strong."
>
> Battenberg said Delphi is continually reviewing its operations but has
> no
> restructuring plans. He said there are no Delphi operations that are
>
> "troubled."
>
>
>
> - By Andrea Puchalsky; 313-226-1251
>
> andrea.puchalsky@wsj.com
>
> |
