Morningstar.com
Federal-Mogul Hits Several Large Potholes
By Travis Pascavis
Federal-Mogul's (NYSE: FMO - news) stock fell about 20% in late-morning trading today, on top of its 66% slide in 1999. Investor antipathy for the company's shares is justified, given that Thursday's earnings warnings followed a string of disappointments for the company.
After the market closed Friday, the company announced it would miss second-quarter expectations, and it lowered the outlook for the rest of 2000. Management has guided analysts' estimates to $0.65 for the second quarter, a 42% decrease from the prior estimate, and to $3.00 for the year, a 22% decrease.
Federal-Mogul's woes begin with soft conditions in retail car parts, which account for almost 45% of total revenue. Executives projected that sales from this segment would decrease 8% for the year. Because retail car parts sell at relatively high margins, that will take a big bite out of earnings.
Not all Federal-Mogul's problems are external. The company implemented a new warehouse computer system that was supposed to reduce distribution costs. The botched implementation, though, caused orders to be delayed. The company has acknowledged that as a result it lost several smaller customers and other large customers are seeking backup suppliers. Although this problem should be temporary, Federal-Mogul will need to regain its customers' confidence.
Federal-Mogul is taking some steps in the right direction. It is increasing spending on marketing and research and development, which it cut in the past in an effort to meet earnings estimates. Although higher spending hurts the company's earnings in the short run, it should help the company stay competitive against such rivals as Dana (NYSE: DCN - news). Federal-Mogul's products need to remain current with industry's trends, and the only way it can do that is through its own research.
While some investors have been jostled by Federal-Mogul's uneven stock performance, the current depressed stock price already reflects most of its risks. However, cautious investors may want to rethink these shares, as the company's performance doesn't seem likely to improve any time soon.
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