Long-term issues to overshadow quarterly results
The US Auto and Auto Parts industry faced an extremely difficult production and
sales environment during Q1. But we believe that a few companies are positioned
to deliver growth despite the headwinds, including Autoliv, BorgWarner,
Goodyear, Johnson Controls, LKQ, and TRW. Cooper Tire, General Motors,
Magna and Visteon have potential to underperform relative to consensus.
Deutsche Bank Securities Inc.
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be aware that the firm may have a conflict of interest that could affect the objectivity of this report.
Investors should consider this report as only a single factor in making their investment decision.
Independent, third-party research (IR) on certain companies covered by DBSI's research is available to customers of
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request that a copy of the IR be sent to them.
DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1
Industry Analysis
Companies featured
General Motors (GM.N),USD19.62 Hold
Autoliv (ALV.N),USD50.00 Buy
American Axle & Manufacturi (AXL.N),USD21.21
BorgWarner (BWA.N),USD43.44 Hold
Cooper Tire & Rubber (CTB.N),USD14.52 Hold
Ford Motor (F.N),USD6.69 Buy
Goodyear Tire & Rubber (GT.N),USD25.50 Buy
Johnson Controls (JCI.N),USD32.64 Hold
Lear Corporation (LEA.N),USD24.99 Hold
Magna International (MGA.N),USD69.57 Hold
TRW Automotive (TRW.N),USD23.16 Buy
Visteon (VC.N),USD3.55 Hold
Asbury Automotive (ABG.N),USD14.05 Hold
AutoNation (AN.N),USD14.95 Hold
LKQ Corporation (LKQX.OQ),USD20.07 Hold
Accuride Corporation (ACW.N),USD8.04 Hold
Global Markets Research Company
U.S. Pickup Truck and Large SUV demand continues to deteriorate
While weak NA production levels represent near term challenges, we remain most
concerned about secular shifts that could affect long term profitability. Large
pickup and SUV segment share in Q108 was 15.9%, down 160bp’s from FY2007
and 190bp’s from Q107. Some industry participants believe that large pickup
demand could decline to the 11-12% range (compared to 13.4% in 2007) within
the next few years. We estimate every 100bps contraction in segment share
would reduce GM and Ford’s earnings power by $1.00 and $0.20 respectively.
Instability could come from surprising sources
Several suppliers have raised concerns about the health of tier 2 suppliers (i.e.
Supplier’s suppliers). Many of those companies maintain receivables based
borrowing facilities, and have experienced significant constraints on liquidity as a
result of lower production levels (the American Axle strike is exacerbating this
problem). Weak tier 2 suppliers, and rising raw material costs, could affect cost
savings targets throughout the value chain.
Within our universe, we favor ALV, TRW, GT, and F
We favor companies with strong geographic diversity (ALV, TRW), significant
aftermarket exposure (GT), and significant cost savings potential (F, GT). While we
see weak demand affecting all of these companies (even U.S. replacement tire
demand has moderated), we believe that current valuation levels reflect overly
bearish expectations. Although JCI is also viewed as defensive, we remain
concerned about deteriorating fundamentals in Building Efficiency (given the
precipitous decline in indicators such as the AIA index) and Automotive segments.
Estimate revisions
Due to higher than expected GM truck production during the AXL strike, we are
increasing 1Q08 estimates for AXL (to -$0.41 from -$0.60), Lear (to $0.48 from
$0.39), and Magna (to $1.40 from $1.33). We are lowering our Autoliv 1Q08
estimate to $1.03 from $1.11 to reflect lower supplier cost savings.
Sector Valuation/Risks
We utilize an EV/EBITDA valuation methodology for our companies with extensive
liabilities and P/E valuation methodology for companies that generate considerable
free cash flow and exhibit an ability to consistently grow earnings. The principal
sector risks include: 1) significantly higher or lower-than expected North American
auto demand and 2) a significant change in mix outlook.