With all the attention large automakers such as General Motors (GM: Charts, News, Offers), Ford (F: Charts, News, Offers) and Toyota (TM: Charts, News, Offers) have been receiving, smaller manufacturers which produce auto supplies have been widely overlooked by mainstream investors. One such company is Livonia, Michigan-based TRW Automotive (TRW: Charts, News, Offers), a diversified supplier of auto systems, modules and components to global auto OEMs (85% of sales) and aftermarket retailers. Its company is not well recognized, as all its business is conducted through its subsidiaries. The company produces products in four segments – Chassis Systems, Occupant Safety Systems, Electronics and Automotive Components. Its main operations are classified as active and passive safety products – active products include braking and steering controls, while passive products include airbags, seat belts and electronic safety sensors.
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TRW’s fourth quarter earnings beat analysts’ estimates by a wide margin. Its 46% increase in earnings, or $1.72 per undiluted share, far exceeded expectations of $1.24 per share. Quarterly sales increased 9.7% to $3.71 billion, and the company reduced its net debt by $815 million to $768 million. Wall Street estimates that the company will grow its earnings by 6% in 2011, but this may be an extremely conservative figure considering its blowout quarter. Taking into account Standard & Poor’s estimates of 13% growth in U.S. light vehicles sales in 2011, combined with TRW’s 25% exposure to the car safety market, margins are likely to grow as debt is reduced further. In addition, bad PR regarding recalls plaguing the major automakers will likely lead to increased spending in reputable safety devices.
For 2010, TRW made $834 million, or $6.49 per share, compared with $55 million, or 51 cents per share in 2009. Its full year revenue climbed 24% year-on-year to $14.4 billion, a record since the company became independent in 2003. CEO John Plant stated that, “TRW ended the year with a significantly improved capital structure including a record low net debt level.” The company also forecast North American auto production to increase 7% to 12.7 million vehicles, from 2010′s figures. European production is forecast to be flat at 18.7 million units. TRW expects full-year revenue between $14.9 to $15.3 billion, with first quarter sales of $3.9 billion. These figures are in line with the analysts’ forecast of full-year revenue of $15.37 billion.
The company’s large customer base consists of big names such as General Motors, Volkswagen and Ford – the three of which have traditionally provided TRW with nearly half of its revenue. However, its business has room to grow – namely overseas in China, where General Motors has carved out a niche as the largest foreign automaker in the country, and national brand Geely has made a name for itself by acquiring Volvo. Looking forward, the company may face economic headwinds with rising commodity prices, especially in steel, but this will likely be offset by government mandates requiring all passenger cars to have side airbags by 2012. A weak U.S. dollar will also increase its earnings stateside due to declining costs overseas.
TRW is actively focused on BRIC markets – it has aggressively expanded in both Brazil and China. Even the flat European market may see improvement by the second half of 2011. Based on these aforementioned bullish factors, optimistic analysts are pegging an EPS growth of 19% over the next five years. TRW’s main competitors include Autoliv (ALV: Charts, News, Offers), Takata Corporation, Kay Safety Systems, Delphi Corporation, and Visteon VC, which all produce similar active and passive safety components. Shares of TRW currently trade 8 times forward earnings, and if the current investor fear regarding Middle East turmoil may present investors an opportunity to pick up shares at a bargain, as several analysts have pegged price targets in the upper $70s for this stock.
Other News About TRW
TRW Automotive Q4 Profit Rises, Tops View
TRW’s numbers impress.
TRW Automotive tries again to sell facility
TRW attempts to sell its Arizona plant.
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GM may be the catalyst the market needs.
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
