Cash Flow Boosts Auto Parts Players

03/13/2017 7:00 am EST

Focus: INDUSTRIALS

Richard Moroney

Editor, Dow Theory Forecasts

If we had to pick a single metric for identifying cheap stocks, the price/free-cash-flow (P/FCF) ratio would be among the top contenders, explains Richard Moroney, editor of Upside; here, he looks at two ideas in the auto parts sector.

Based on one-month and 12-month holding periods since 1992 for stocks in the broad Dow Jones U.S. Index, no variable has done a better job of selecting the one-fifth of stocks likely to outperform.

Auto parts maker Cooper-Standard (CPS) boasts leading positions in four product lines — sealing, fuel and brake delivery, fluid transfer, and anti-vibration systems. In 2017, revenue rose 4% to $3.47 billion, marking the seventh consecutive increase.

Cooper is benefiting from a favorable product mix, volume growth, and contributions from acquisitions. Last year it added $398 million in new business awards and launched 161 products.

In 2017, Copper achieved $85 million in operating cost reductions. Improved cost controls have helped gross profit margin increase in nine straight quarters.

Shares have rallied since Cooper reported strong December-quarter results on Feb. 16. Per-share earnings were $2.56, up 10% and above the consensus of $2.39. Sales advanced 3% to $875 million.

For 2017, the consensus targets per-share profit growth of less than 1% — a conservative outlook, in our view. Cooper, with a price-to-free cash flow rank of 80, is rated Buy.

Stoneridge (SRI), a maker of electronics used in the auto and truck industries, is benefiting from product launches and increased technology content per vehicle.

The $80 million acquisition of Orlaco Products in January expanded the company’s geographic reach and added high-margin products. Orlaco makes camera systems used in heavy equipment, commercial vehicles, and marine applications.

Stoneridge was scheduled to report December-quarter results on March 2, shortly after Upside’s deadline. The consensus per-share profit estimate was $0.30, up 20%, on revenue of $172 million, up 11%.

Per-share earnings have topped the consensus in three of the last four quarters. For 2017, per-share earnings are expected to advance 7% on sales growth of 6%.

Shares have climbed 33% over the past year, but the stock still has upside given the company’s reasonable valuation. Stoneridge, trading at less than 10 times free cash flow, is a Best Buy.

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