Investors, who once abandoned U.S. auto-supplier stocks over fears of an implosion, are returning as improving credit ratings and strengthening balance sheets signal that the worst is over.
Nine months ago, the largest parts makers saw their stocks trading near record lows with some companies, like American Axle & Manufacturing Holdings Inc., trading below 50 cents.
Now, American Axle's stock is hovering above $7.80 while other companies such as TRW Automotive Holdings Corp., BorgWarner Inc., ArvinMeritor Inc. and Goodyear Tire & Rubber Co. have seen their shares more than triple. TRW's stock alone has grown more than sixfold. Despite the increase, most companies still have room to grow since they are still trading below their 2007 levels.
"The recession forced all parts suppliers to make their cost structures very lean and now they are potentially set up for explosive earnings growth as vehicle production gets back to a more normal rate," said Morningstar Inc. auto analyst Dave Whiston. Auto analysts anticipate U.S. vehicle sales to be more in the 11 million to 13 million range for the next three years before slowly increasing.
A survey of more than 200 North America suppliers found that 60% of the companies had reduced their cost structures by more than 20%, according to Grand Rapids, Mich.-based consulting firm IRN Inc. Most companies said the cuts are permanent.
American Axle cut fixed costs by 50% over the past two years and lowered the company's break-even point to a U.S. annualized selling rate of 10 million new cars and trucks.
The number of new cars and trucks sold this year in the U.S. is expected to hit 10.5 million to 10.9 million and increase to about 11.2 million in 2010.
Winners And Everybody Else
"The supplier industry is accelerating its transition into two groups - big winners, and everybody else," said Kim Korth, founder and president of IRN. "The top-performing suppliers are having trouble keeping up with current new program demand, as auto makers look to align themselves with companies that can support their needs."
Ford Motor Co., for example, is aiming to cut the number of suppliers it uses to 1,650 this year from 2,198 in 2008. Chrysler Group LLC slimmed its primary suppliers to about 1,200 from 1,300 through the bankruptcy process.
Whiston said the key to a supplier's financial future is not only the balance sheet, but also the product.
Take Gentex Corp. and BorgWarner. The Zeeland, Mich.-based Gentex is the world's largest developer and supplier of automatic dimming rearview mirrors. The company halted its losses in March and reported profits and has been profitable ever since. The stock trades near $17.60. In March it was below $7.50.
BorgWarner, based in Auburn Hills, Mich., is a major supplier of turbochargers, which auto makers need to make their vehicles reduce emissions. The company returned to profitability in the third quarter. The shares trade above $32 compared with about $15 in March.
Still, the sector faces challenges.
Working capital requirements to meet production demands, increased pension contributions and other expenses will drain cash flows, according to Fitch Ratings.
"We see a modest recovery for the U.S. automotive suppliers in 2010 based on higher projected light vehicle production, the benefits of cost cutting actions in 2009, and recent capital markets transactions which have improved the sector's credit quality," Fitch said in a research note. "The overall credit profile of the U.S. auto suppliers sector remains non-investment grade."
Consolidation Ahead
Small, private companies will take the biggest hit as larger, healthier players begin buying assets to improve their product portfolio.
"They are having a heck of a time getting bank financing so we think that private equity will really start getting active in this area," said CSM Worldwide auto analyst Jim Gillette. "We have seen restructuring on the larger players, but it's the smaller players where the real focus will be in 2010. There is still a huge amount of unneeded capacity such as molding parts and stamping such as the making of exhaust parts."
Two such deals have closed in the past few weeks. Dana Holding Corp. sold its structural products business to Mexican auto-parts maker Metalsa S.A. de C.V. Former bankrupt and privately held Dura Automotive Systems Inc. was acquired by private-equity firm Patriarch Partners LLC.
(Source: irco.biz)
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