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Technological Innovation Will Ensure a Profitable Future for This Auto Parts Supplier

April 18, 2014 | About:

With safety regulations getting stricter for automotive manufacturers, auto-parts suppliers which manufacture safety automotive systems and components are avid to gain profit from this context. This is the case of multibillion dollar auto-parts manufacturer TRW Automotive Holdings Corp (TRW). The company focuses on designing, and manufacturing active and passive safety automotive products for OEMs and the aftermarket. Furthermore, TRW has four business segments: the Chassis Systems segment, the Occupant Safety Systems segment, the Automotive Components segment, and the Electronics segment. Each of this operating businesses are respectively responsible for 66%,19%,11% and 4% of sales.

The Chassis segment focuses on manufacturing products related to brake and steering modules, as well as on linkage and suspension. In addition, the Occupant Safety Systems segment manufactures airbags, seatbelts and restrain systems. As for the Automotive Components segment, it produces body controls and some engine components as valves. Finally, the Electronic segment focuses on the design of electronic components for safety systems, chassis, powertrain and driver assistance. With a 2013 revenue of $17.4 billion, let me show you why this company is a great investment opportunity.

Increasing Shareholder Profit Through a Strong Financial Position

In the global auto-parts manufacturers market, the company has to deal directly with big competitors such as JTEKT Corp (JTEKF) or Takata Corporation (TKTDY). Moreover, TRW has to compete in the safety auto-parts segment with other strong manufacturers such as Autoliv Inc. (ALV). However, the firm managed to maintain a strong financial position indicated by its reported full-year and fourth-quarter EPS of $6.89 and $1.84, respectively.

Furthermore, the company has been able to improve its financial performance through reducing its debt by $250 million. In addition, TRW´s board of directors expanded the firm´s share repurchase program by $1 billion. Hence, the increase in the share repurchase authorization implies a total authorization of $2 billion. This program is expected to be executed in the next three years, and will strongly increase shareholder value. Last year the company already repurchased 6.5 million shares for $460 million, showing a strong commitment to maintain good financial performance.

Technological Innovations Are the Way to Maintain Revenue Growth

As mentioned above, safety regulations will boost TRW´s sales. Thus, the company is expecting the implementation by the U.S. National Highway Traffic Safety Administration, of a regulation that requires cars to have side-impact safety devices for 2014.

Furthermore, the company strongly invests in technological innovation to win new contracts. For example in 2013 TRW supplied Ferrari with its Electrically Powered Hydraulic Steering (EPHS) technology for the production of the LaFerrari model. This new sports car is Ferrari´s first model with hybrid propulsion. In April 2014, TRW signed a contract with Citroen for the implementation of its new roof airbag technology in the production of the Citroen C4 Cactus. This new contracts, among others such as the one signed for the production of the Qoros 3 Sedan, are expected to be very good growth opportunities for the company.

TRW´s Great Prospects for the Following Five-Year Period

A net income of $970.0 million in 2013 is a good indicator of the efforts the company has been doing in the past years for reducing its debt, and strengthening its financial position. Furthermore, as shown in the following chart, these efforts strongly benefit shareholders and avid investors which are looking for a great investment opportunity. Moreover, the fact that the stock can currently be bought at a price discount is also an encouraging incentive for new investors.

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In addition, the company's upward tendency in revenue and net income, accompanied by a demonstrated year-over-year debt reduction, has tempted investment gurus such as Joel Greenblatt (Trades, Portfolio) and John Hussman (Trades, Portfolio). Furthermore, the ratios that I am about to present make me also feel very bullish about this stock. With an ROE ratio of 23.13% and EPS growth of 7.00%, this company sure is worth investing in. Finally, a revenue growth rate of 8.50% is expected to ensure profitable outlook for the coming five years.

Disclosure: Vanina Egea holds no position in any stocks mentioned.

About the author:

Vanina Egea
A fundamental analyst at Lone Tree Analytics

Visit Vanina Egea's Website


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