Auto-Parts Companies...Out of Favor-- FMO, TRW,DCN, LEA, DPH, VC .....etc
JUNE 19, 2000
Brakes on Performance?
Spun-off Visteon will have fat labor costs, deep dependence on ex-parent
By ANDREW BARY
At a time when industrial stocks are falling from favor on Wall Street amid concerns about an economic slowdown, no companies are more unpopular than auto suppliers, with such stalwarts of the sector as Dana and Lear trading at half their 52-week highs and the average supplier fetching less than eight times projected 2000 profits. In this tough environment, Ford Motor is spinning off its big auto-parts unit, Visteon, to its shareholders. Not surprisingly, Visteon stock is faring poorly in when-issued trading ahead of the June 28 distribution date, when investors will receive one Visteon share for about every 7.6 Ford shares.
Visteon (symbol VC) was quoted around 15 late last week; some Wall Street analysts had expected it to be changing hands in the low 20s. And the stock may come under additional pressure once the spinoff occurs, because index funds and other institutional holders may dump the shares, which are unlikely to be included in the S&P 500 Index because of its relatively small market value of $2.1 billion. The Visteon distribution, part of Ford's program to boost its share price through a streamlining of its operations and a complex $10 billion cash payment to shareholders, is now valued at about $2 per Ford share.
Over the long term, Visteon could prove rewarding because it appears inexpensive by just about any financial measure. At 15, it trades for under five times projected 2000 profits of about $3.40 a share, a fraction of the company's book value of $23 a share and just 20% of its sales, using its enterprise value (debt and equity). Based on this low valuation, Ford holders might do well to hold the Visteon stock they will soon receive.
But other auto-parts companies also are inexpensive and don't carry some of Visteon's baggage, such as: heavy reliance on a single customer, Ford, which accounts for 85% of its projected 2000 sales; a high-cost contract with the United Auto Workers union; and a management team headed by Ford's former labor-relations chief that hasn't generated much enthusiasm among institutional investors.
"These stocks are extraordinarily cheap," says Rick White, co-manager of the Neuberger & Berman Guardian fund. "But in this environment, you want to be in the stocks with the best stories." White prefers Lear to Visteon, noting that Lear has a more diversified customer base. Lear's largest customer, Ford, accounts for less than 30% of its sales. At its recent price of 23, Lear wasn't even at 50% of its 52-week high of 52 and was trading at five times projected 2000 profits.
Table: Cheap Stock, Inexpensive Sector
Of other suppliers, Gentex possesses the highest multiple because it's viewed as a growth stock, owing to the expanding popularity of its main product, mirrors that dim automatically in the glare of headlights. Federal-Mogul appears very inexpensive at around four times projected 2000 profits, but the Street is concerned about its heavy debt load of $4 billion and management's announcement last month of a big second-quarter profit shortfall.
TRW has a somewhat higher P/E multiple than the others, trading at nine times projected 2000 profits. But TRW owns a valuable stake in RF Micro Devices that's worth around $8 per TRW share. Strip out the RF Micro stake and TRW trades for eight times earnings. TRW, though, also represents a hidden technology play; it has developed chips using gallium arsenide, a material that offers high performance with minimal power needs. These chips have turned RF Micro into a hot supplier to Nokia and other wireless players. TRW also has a half-interest in Endwave, a company that could go public later this year. Endwave uses TRW's chip technology for wireless broadband transmission.
TRW also has other promising technology, including precision lasers that could prove useful to the semiconductor industry and photonics, an optical transmission technology. Perhaps the most valuable yet-to-be-developed asset in TRW's technology bank could be a high-speed microchip based on indium phosphide, which could have fiberoptic and other communications applications. David Bradley, a J.P. Morgan auto analyst and TRW bull, believes the company may try to commercialize this technology by yearend. TRW developed much of its chip expertise by working for the defense department on spy satellites, which must process vast amounts of data using very limited power.
The auto-parts stocks generally are in the dumps because of concerns that the U.S. vehicle market will weaken. There also are fears that major manufacturers will demand further price concessions and use their online supplier networks to bludgeon already-squeezed parts makers.
The bullish case for Visteon is that it will successfully expand its non-Ford business through its strength in electronics and systems integration; cut costs and improve its low margins, which stood at 1.5% last year -- a fraction of the industry average of around 5%. Ford trimmed the prices it pays Visteon by an average of 5% in early 2000.
Gary Lapidus, an analyst at Goldman Sachs, projects that Visteon's earnings will rise to $3.43 a share this year from a pro-forma $2.16 in 1999, increase 28% in 2001 to $4.40 and another 25% in 2002 to $5.48. If that happens, Visteon's stock price could easily double in the next two years.
But others are doubtful about Visteon's prospects. For starters, Visteon is even more dependent on Ford than Delphi Automotive is on its former parent, General Motors. Delphi gets about 76% of its revenues from GM, which spun off Delphi to shareholders last year. Delphi trades at a higher multiple than Visteon, fetching around eight times projected 2000 profits, based on its recent price of 16, because of a better-known management team led by J.T. Battenberg; and Delphi's role in developing communications equipment. Delphi equips GM cars with Onstar, an in-vehicle communications systems that the automaker is eagerly marketing to other car manufacturers. (Honda and its Acura luxury unit already have agreed to put it into some models.)
Visteon CEO Peter Pestillo
In contrast with Battenberg, Peter Pestillo, 62, the new chief executive at Visteon, hasn't had much contact with Wall Street because of his longtime roles at Ford in labor, corporate and government relations. Pestillo, a Ford vice chairman, has little operating experience and is viewed as a caretaker CEO until Visteon recruits or promotes a younger executive to the top spot in a few years.
Some investors aren't happy that Pestillo still has a significant financial interest in Ford through options on nearly 500,000 of the carmaker's shares. They'd like to see Pestillo convert all his Ford-related stock compensation into Visteon-linked holdings, thus demonstrating his singular commitment to his new company, just as Battenberg did when he left GM to head Delphi.
Visteon does boast good labor relations with the UAW, but that harmony comes at a price. Visteon workers remain Ford employees, technically "leased" to Visteon. These workers are covered by the more generous UAW contracts with the Big Three automakers, rather than the less expensive contracts with suppliers. The total compensation per Visteon UAW worker is estimated at around $43 an hour, $20 above what comparable UAW workers get at Lear.
Visteon's employees also are now covered by Ford's bonus plan, whose annual payments are pegged to Ford's profitability, not Visteon's. Visteon is liable for $50 million in annual bonus payments to its UAW workers through 2004, with Ford picking up anything above that.
Visteon seems like a steal at its current price, and it could eventually be a big winner. But there are arguably even better values in the depressed auto-parts sector.
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Cheap Stock, Inexpensive Sector
Ford is spinning off its auto-parts unit, Visteon, at a time when the sector is very out of favor on Wall Street because of concerns about margin pressure and a weakening U.S. vehicle market. Visteon now fetches less than five times projected 2000 profits, but other auto-parts companies like Lear and Dana also have very low valuations. Opportunity?
52-Week Earnings Per Share
Company Symbol Price 6/15 High Low Change
12 Mos Market Value (mils) 1999 2000* P/E 2000**
Dana DCN 23 1/16 50 20 -53.4% $3,794 $4.07 $4.28 5.4
Delphi Automotive DPH 15 13/16 21 14 -14.5 8,934 1.91 2.10 7.5
Federal-Mogul FMO 11 9/16 56 9 -77.0 854 4.08 2.88 4.0
Gentex GNTX 28 1/2 40 16 -14.6 2,089 0.86 0.99 28.8
Johnson Controls JCI 52 5/8 74 46 -17.9 4,496 4.33 5.15 10.6
Lear LEA 22 1/8 52 19 -50.4 1,485 3.79 4.49 4.9
Magna Intl MGA 47 13/16 61 38 -19.2 3,755 4.75 5.53 8.6
TRW TRW 48 1/4 65 39 -10.1 5,867 4.59 5.10 9.5
Visteon VC 16 NA NA NA 2,080 2.16 3.43 4.7
*Estimated
**Based on estimated 2000 earnings
Sources: Baseline; Goldman Sachs |
