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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Paul Senior who wrote (23753)	4/16/2006 4:13:23 PM
From: Dave	Read Replies (1) \| Respond to of 78671

RE: Lear and Auto Parts You are correct in that more than 60% of Lear's revenues (in seats) is attributable to GM, F, and DCX (That's the old "C" ticker, right). This is the "big picture" thesis on Lear. Lear has three businesses; one of which is a great business (Electrical components), one of which is a good business (seats), and one of them is an absolutely horrible business (interiors). Historically, Lear has earned high ROCs since the "good business" (Seats) is essentially a duopoly amongst JCI and Lear. While Lear's fate is tied to GM, F, and DCX, I believe what the market fails to see is that Lear is strengthening their partnerships with Asian vendors, more specifically, Nissan. The key to understanding the "seat" business is that seats are both heavy and large. As such, any "labor arbitrage" that one vendor can utilize by assembling in China is quickly "arbitraged away" due to shipping and transportation costs. On the other hand, Lear's factories for seats are located "very close" to automobile assembly lines. So, for about 70% of their revenue stream, I'd argue that there is a moat and a competitive advantage. When thinking about this, think also about WHR how they source their parts globablly, but assemble locally! Interiors is either going to be spun off to Ross, sold, or destroyed so it is much ado about nothing. Electrical connectors is a great business and production is outsourced overseas to low cost countries like, i believe, the Phillapenes (sp?). RE: Auto Parts Retailers That, to me, is an extremely interesting space. All companies such as AAP, AZO, and ORLY are doing quite well on a ROC basis. This sector has a natural moat since auto parts are a slow turning business. As such, the WMTs of the world won't get into it. Furthermore, from recollection, I believe that the largest publicly traded auto parts retails have about 30% share in the US. Auto parts retailers is a highly fragmented business with lots of mom and pop shops around. Another interesting thing about this business is that it is not cyclical at all. Think about it, when your car breaks down, you have to get it repaired or you don't go to work. Third, the average age of automobiles is getting older and we are entering the "Sweet spot" of age where autos need more repairs. Moreover, until gas prices shot through the roof, Americans were continuing to put more and more miles on their cars each year. Fourth, while DIY (Do-it-Yourself) is the model that everyone thinks of, the key to "growth" is the DIFM (Do it for me) model selling to garages and the like. This is generating nice growth. AZO is more of a turn around story, but ROC is very high. I believe that one of the reasons why SSS has been falling is due to the fact that AZO is more expensive than a comparable AAP. (I priced checked various items such as spark plugs and light bulbs using the Internet). AAP is the "Growth" story and if you look at their historical operating margins, margins continue to increase which is a good sign. AZO has 15-17% op. margins whereas AAP has 10-12% op. margins. I'd continue to look for AAP margin expansion. My best idea is Lear, FWIW. Good business, good management. Mr. market has become quite pessismistic given that Delphi, Collins & Aikman, and Dana are in bankruptcy and is shooting first. Remember, spark plugs and small, light things can be outsourced very easily. Engine blocks, chasis and other large heavy items cannot.