TRW's Revved-Up Earnings? Yes, Please

02/23/2011 9:45 am EST


Jim Jubak

Founder and Editor,

I’ll take it—the fourth-quarter earnings report, that is.

And I’m going to add TRW Automotive Holdings (NYSE: TRW) to Jubak’s Picks when the market opens February 23. The stock fell by 3.2% Tuesday (Feb. 22) to $57.65.

In the fourth quarter, TRW Automotive saw a 32% increase in earnings per share from the fourth quarter of 2009, the company reported February 16. Excluding one-time items, earnings grew by 46%. Either way, earnings of $1.56 or $1.72 a share easily beat the consensus Wall Street estimate of $1.24. Sales in the quarter climbed by 9.7% to $3.71 billion. The company reduced its net debt by $815 million to $768 million. (Net debt is debt—$1.846 billion at the end of 2010—minus cash and cash equivalents—$1.078 billion.)

Everything about the quarter tells me that the Wall Street estimate of 2011 earnings growth of just 6% is too low.

The US auto industry is rebounding, and results at the auto suppliers are even more leveraged to that rebound than are those of the automakers themselves. (For more on the auto suppliers, see this post.) Standard & Poor’s estimates that US light-vehicle sales will climb by almost 13% in 2011. I think sales at TRW Automotive should climb at that rate or even slightly better given the company’s exposure (25% of sales) to car safety systems, which are an increasingly important part of the selling proposition for carmakers. In addition, the company’s reduction in debt should, along with increased sales, lead to slightly higher margins in 2011.

I’m buying these shares with a one-year target price of $78 a share. On February 22, TRW traded at nine times 2010 earnings per share.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this post. The fund did own shares of TRW Automotive as of the end of January. For a full list of the stocks in the fund as of the end of January, see the fund’s portfolio here.

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