The automobile industry is not going anywhere any time soon, and as such it is a good place to look for long-term growth. Stoneridge (SRI, Financial) is a global designer and manufacturer of engineered electrical and electronic components, modules and systems for the automotive, commercial, motorcycle, off-highway and agricultural vehicle markets. The company is currently trading around $31.20, has a market capitalization of $889 million, and is divided into three segments: Control Devices, Electronics and PST.
Control Devices produces components and instruments that monitor, measure or activate specific functions within a vehicle, including sensors, switches, valves and actuators. Electronics include control units and driver information systems. PST is engaged in the design, manufacture and sale of in-vehicle audio and video devices, alarms and vehicle accessories. It primarily serves the South American market.
Although the stock has rewarded investors mightily over the course of the last year, appreciating 120% from its 2017 low last June, we believe there is more growth in the offing.
In this research note, we analyze the company’s latest financial results and highlight the prospects and pitfalls that this stock faces.
Financials
Stoneridge’s recent financial results have been strong. Sales for the first quarter of 2018 came in at $225.9 million, up 11% year-on-year. Adjusted gross profit for the same period was $68 million, up 9% year-on-year. Adjusted earnings per share came in at 50 cents, up 33% compared with the first quarter of 2017.
This impressive growth was driven primarily by the Electronics segment, which produced revenue growth of 34%. Overall, these results paint a rosy picture, and management has revised its 2018 guidance accordingly. It now expect total sales for 2018 to come in somewhere between $870 million and $890 million, up from its old $840 million to $860 million range. Expectations for earnings per share have also been revised upwards: Management now forecasts a $1.90 to $2.10 range, the midpoint of which would mark a 27% increase compared with 2017.
Positives
In 2017, Stoneridge made two key acquisitions. The purchase of Orlaco, a designer and manufacturer of camera-based vision products has been particularly lucrative, expanding Stoneridge’s range of vision and safety products. The two companies have worked together since 2015, developing the MirrorEye mirror replacement system.
Management have indicated that they intend for the MirrorEye system to become a key part of their growth strategy, and that they are focused on targeting every applicable market worldwide. Stoneridge has submitted a request to the Federal Motor Carrier Safety Administration (FMSCA) for an exemption to a current regulation that requires vehicles to have external side mirrors (the MirrorEye system is housed completely inside the vehicle). This has particularly relevance for the trucking industry, as the large size of these vehicles makes maneuvers like blind back-ins difficult. Regardless of whether the exemption is granted, we see enormous growth potential for this technology.
The second acquisition was for the remaining 26% of PST Electronica (now one of Stoneridge’s three business segments). Sales at the group have risen 15% over the course of the last year, and the history of close cooperation between PST and Stoneridge has kept integration costs low.
Risks
A significant risk for Stoneridge is its reliance on large automakers, which make up the bulk of their customer base. Ford alone account for 14% of all sales, although General Motors, Daimler, Volvo and Scania make up a significant proportion of sales too. Obviously the cancellation of any deals between Stoneridge and any one of these auto giants would be a major blow to earnings. That said, contracts are generally long-term in nature, which will give management time to amortise the impact from any such blow.
Verdict
Overall, we see a company that is well-positioned to continue to build on its stellar record from 2017. The Orlaco and PST acquisitions have provided Stoneridge with the technologies and personnel to continue its expansion, both geographically and across a number of sectors. Although the top-heavy customer base is a little concerning, barring a systemic shock to the automobile industry, we do not view contract cancellation as a high-probability event. With so much of the market overbought, it can pay to invest in a company with solid growth potential like Stoneridge.
Disclosure: I/We own no stocks discussed in this article.
This article was co-authored by Stepan Lavrouk, an investment analyst with Almington Capital – Merchant Bankers.
