The Benefits of Bankruptcy

05/13/2008 12:00 am EST


George Putnam

Editor, The Turnaround Letter

George Putnam III, editor of the Turnaround Letter, says auto parts maker Federal-Mogul emerged form bankruptcy a stronger, leaner company.

Federal-Mogul (Nasdaq: FDML) is a global manufacturer of automobile parts. It sells its products both to the major auto makers and in the aftermarket (to consumers and repair shops). It has such well-known brands as Champion spark plugs, ANCO wiper blades, Sealed Power pistons, and Wagner brake pads.

Dating back to 1899, the company was particularly acquisitive in the late 1990s, growing revenues from $2 billion to more than $6 billion. Unfortunately, Federal-Mogul had trouble integrating all of the acquisitions, and operational problems ensued.

Moreover, several of the acquired companies had at one time used asbestos in their products, and Federal-Mogul inherited the liability for asbestos-related lawsuits. These problems forced the company into Chapter 11 in 2001. It emerged from bankruptcy late in 2007.

Federal-Mogul took full advantage of the Chapter 11 process, not only to eliminate its asbestos liabilities, but also to streamline its operations. During its time in bankruptcy (which was prolonged by the asbestos issues) the company divested a number of non-core businesses, and consolidated many of its manufacturing facilities.

In addition, Federal-Mogul moved manufacturing operations to lower-cost locations such as Mexico and Eastern Europe. The company emerged from bankruptcy as a lean producer with global reach. As a result, Fed-Mogul is in much better shape than many of its competitors.

It has strong ties to several of the non-US auto makers, and therefore is less reliant on the weaker domestic players General Motors, Ford and Chrysler. Further, its well-known brands and healthy after-market business give Fed-Mogul an additional edge.

The management team appears to be quite deep, with extensive automotive and international experience. Prior to joining Fed-Mogul, CEO Jose Maria Alapont spent more than 30 years with Fiat, Delphi and Ford, mostly focused on international operations.

Financial results have been steadily improving. Despite the distractions of bankruptcy, sales, and cash flow have been growing nicely over the past several years. Now that the company is out of Chapter 11, the improvement should accelerate.

There is [also] a large, savvy holder of Federal-Mogul stock: Carl Icahn controls about 75% of the equity. Normally, we view a large holder as a positive, but Mr. Icahn’s record of looking out for his fellow stockholders has been mixed. We believe that Fed-Mogul’s stock is quite cheap. When the company first emerged from bankruptcy at the beginning of 2008, the stock traded at 27. The general nervousness in the markets, together with the fact that the stock was thinly traded on the “pink sheets,” drove the stock below 20.

The stock has recently been listed on Nasdaq, and we think this will make more investors aware of Fed-Mogul’s potential. We recommend buying Federal-Mogul up to 30. (It closed below $21 Monday—Editor.)

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