Automotive parts company Federal-Mogul (FDML, Financial) reported not-so-impressive results for the third quarter. Investors had been expecting a better performance from Federal, but the company missed estimates. However, management is counting on the increasing year over year sales, and it thinks that the growing sales could drive sinking Federal towards profitability. Let us have a look at how Federal-Mogul is planning to improve.
Results and outlook
Moving on to the financials, Federal-Mogul posted a good 11% increase in the net sales as compared to the same quarter last year. The company on the other hand posted operating net income of $70 million while the operational EBITDA for the third quarter was $152 million which in turn is 8.1% of the sales. This is also better than $147 million which it is posted in the same quarter last year. On the earnings front, Federal-Mogul posted a net loss of $0.12 per share.
If we look closely, the company is showing some bright signs of improvement as it is seeing a good improvement in the sales. The improvement in the sales clearly indicates that it is getting traction in the market for its products. While some of the analysts still think that company has much steam for improvement but it might be suffering a negative impact due to the $25 million spent on the restructuring in the past. The company also spent around $12 million on acquisitions which also had a bad impact on its results.
Initiatives to power growth
Federal is now focusing on various initiatives to improve profitability. It is taking various strategic steps which could lead it to better financial stability. Under a strategic initiative, it has already separated into independent publically traded companies. This move by Federal will not only provide operational and financial flexibility but also strong management of the two separately will add more to its operational excellence leading to better contribution to the top line.
The company has lost some cash on acquisition which also impacted its results. But Federal-Mogul is pleased with that strategic move and is expecting the TRW acquisition to contribute well to it. The company is already receiving a positive feedback about this. Further, Federal is expecting its engine valve business to emerge as a core product for it, helping to further create its market leadership in the segment. Moreover, Federal also serious expansion projects in line. It is opening new piston ring plant in Mexico to serve its automotive customers in Northern and Southern regions of America. Also it is making significant investments in China for other product lines, focusing on valve seats and guides. Further with the changing market structure, Federal-Mogul is confident of better performance from market in Mexico. However, the company needs some investment to support it yet, Federal is expecting it to be a strong long term prospect for it in future.
Moving on, Federal is repositioning its distribution footprint by adding new products to its product portfolio in the distribution centres on the East and the West coast. If its moves works well, Federal-Mogul is expecting these new distribution and packaging foot prints to improve its market coverage. This will also improve its margins as this will also result in lowering the transportation costs.
Further, the investments made by Federal in AutoMD.com, which is a leading market place for consumers seeking high quality auto repair and parts information. This will help the customers to easily have an option to get their desired services. Federal is expected to have an added advantage which will grow its sales with this initiative. In addition, Federal-Mogul has also made several acquisitions in this quarter and it expects these acquisitions to produce synergies in the coming quarters and once it is in its full pace, it is expected to produce synergies of about $45 million and more. With all such strategic moves, Federal-Mogul is laser focusing on making its long term objectives strong.
Conclusion
Moving to the fundamentals, Federal Mogul doesn’t have a trailing P/E as the company is still making losses however, the forward P/E of 12.39 shows good improvement in the earnings in future. The company might be suffering from a short term weakness now due to large sum of money lost due to restructuring attempts and acquisitions. But the synergies that company is expecting to get after its maturity are impressive and can help it to be a good long term holding. So, considering all aspects from the investment perspective, Federal-Mogul looks like a good long term investment. So the investors seeking long-term gains can definitely include Federal-Mogul in their portfolio.
