More Than the Sum of Their Parts?

10/24/2007 12:00 am EST

Focus:

George Putnam

Editor, The Turnaround Letter

George Putnam, editor of The Turnaround Letter, says it might be a good time to take a look at the beaten-down auto-parts industry.

Now that General Motors has agreed on a new contract with the United Auto Workers Union, is this a good time for investors to look at the automotive sector? While the big automakers still have many challenges ahead of them, a number of their suppliers have done a good job of weathering the recent storms in the industry and could be poised to rebound.

Several of these auto parts makers are clearly solvent, have strong niche businesses with the major automakers, and also pay decent dividends. Others have had problems but are taking steps to restructure and could be very interesting [in the future]. It could still be some time until Detroit regains its popularity on Wall Street, but these stocks should benefit disproportionately in a recovery. The stocks below are discussed more or less in order of risk, with the least risky first.

Superior Industries International (NYSE: SUP) produces aluminum wheels for a number of automakers. The company is known for its high degree of operating efficiency and its pristine balance sheet. Even in light of recent operating losses, Superior has plenty of cash on its books. (It closed below $21 Tuesday—Editor.)

ArvinMeritor (NYSE: ARM) is known for its exhaust systems and other vehicle sub-assemblies. The company is well positioned with the Big Three US automakers. Cash flow in recent years has been strong despite the industry slowdown. The shares pay an attractive dividend, and they offer excellent gain potential when the industry stabilizes. ArvinMeritor could also grow through acquisitions if the industry continues to restructure. (The shares closed around $14.50 Tuesday—Editor.)

American Axle & Manufacturing (NYSE: AXL) is a leading supplier of axles and axle sub-assemblies. The company has seen a fair amount of variability in its results in recent years, although recently they have been trending upward. Between the company’s cash and its substantial credit facilities, the company has plenty of liquidity in case conditions are slow to improve. Here again, there is a nice dividend. (The stock closed Tuesday above $24, and it yields 2.5%—Editor.)

Visteon (NYSE: VC) is a large, integrated parts supplier closely aligned with Ford, [which spun it off in 2000—Editor]. Last year, Visteon and Ford agreed to transfer a number of Visteon’s underperforming plants to Ford and enter into a sweeping buyout plan for former Visteon employees. The changes resulted in a streamlined company with lower costs and a more liquid balance sheet. Today Visteon is still losing money from a cash flow standpoint, but it should have enough cash and credit availability to be a survivor. (It closed Tuesday below $6—Editor.)

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