Paul - good analysis of Dana, both the risk (cyclicality, auto and truck parts industry) and the bull case (valuation). What I think you might have missed is the quality of the company. I do not like auto parts companies at all. As you point out, I think it is a low return business mainly because the customers have so much power over their suppliers. But Dana has always been the best in the sector. The best managed, the most profitable. I think the only way an investment in Dana turns out badly a year from now is if the U.S. goes into recession, then we probably go to book value. I'm not sure if I'd buy it myself - I'm just throwing it out there as a high quality large cap company trading at the lowest p/e multiple it has traded at in the last ten years, with a 4% dividend yield.
Eaton is another story entirely. Extremely well managed and highly profitable company. This company is on the same level as an Allied Signal. Investors put it in the truck sector, which is their largest business by by no means the dominant business of the company. And what is their truck business? They have something like 85% market share in truck transmissions - a nice business, though cyclical. Most intriguing was the reason for the selloff today. They missed estimates by 10 cents. This is a company that does not manage for Wall Street. They don't do conference calls. Today management arranged a conference call late in the afternoon because they were absolutely incredulous at the reaction to the earnings report - the stock sold off 15 points! They made every operating number - they considered it a good quarter. The "miss" came from a throwaway line item called "other income/expense" that kind of moves randomly. Management was ridiculing the sellside analysts on the call for punishing a company earning over $6 a year for a 10 cent miss of a number that simply doesn't behave on a predictable quarterly basis. I have to agree with them. This game of analyst estimates was exposed at its most ridiculous in this case. (Dana was also interesting in that they didn't miss their number - on their conference call management simply would not state that they are "certain" of the fourth quarter or 2000 numbers. Maybe that's a signal, but I might be more worried about a management in a cyclical business that DID say they are certain about what they will earn a year from now! A high quality stock falls 20% and goes to 7 times earnings because management provides inadequate "guidance" to those who call themselves "analysts". Incredible.)
Art Leavitt, head of the SEC, gave a wonderful speech a couple days ago about the games being played by sell side analysts, companies and institutional investors today. See if you can find it on the SEC site - it describes what I see every day perfectly. It is an absolutely ridiculous way to invest, and should provide many opportunties for value investors who ignore the game and focus on fundamentals.
JJC |
