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TRW Continues to Shine in the Auto Parts Industry

January 04, 2014 | About:

TRW Automotive Holdings Corp (TRW) is global supplier of automotive systems, modules and components to OEMs, and has grown into one of the most powerful players in the industry. Unlike most industry rivals, however, the firm has the ability to generate top- and bottom-line growth in unfavorable market situations, thanks to its ample portfolio. Hence, even when OEM’s aren’t selling big, TRW still manages to get enough business to stay afloat. And, thanks to revamped production levels in the U.S. and China, the company’s innovative technologies are more sought after than ever.

Growing with the current

Given the current market situation, which has seen General Motors Co (NYSE:GM) and Ford Motor Co (NYSE:F) grow steadily, TRW is expected to thrive, as it is well positioned to take advantage of increased demand for auto parts. Safety, as we all know, is a key element in vehicles, and government regulations and customer wishes include higher standards each year. As a key supplier of such goods on a global level, TRW is expected to continue on in its growth trajectory. Innovative products, along with strong customer relationships and high switching costs for clients, are all factors that work in favor of this major auto parts supplier.

A Major Player

In addition to its operations in the U.S., which accounts for a large part of the firm’s business, TRW caters to all the relevant players in the automobile manufacturing industry. This gives the company a degree of geographic diversity and exposure to different markets, which industry rivals envy. Rising demand for auto parts in different markets, means the firm doesn’t have to rely on a single market for sales, thus avoiding the risks inherent to cyclical trends. Overall, this has resulted in a 70.6% EBITDA growth rate over the past five years, and shares gained more than 182% during the past decade. Shares are currently trading near their 52-week high, which is also TRW’s 10-year-high of $80.22 per share.

Winning contracts is one of the firm’s strengths, as it has shown consistently throughout the years. In August of 2013 for example, the company presented a lightweight anchor seat belt pretensioner with rotary design, called the APR1, as its solution for the great need for compact seat belts. In the end, European automobile manufacturers decided to incorporate this innovative product into their vehicles by 2015. New safety cameras, side airbags, and other such technologies, have followed the same path and become hugely successful and thus profitable for the company.

Outlook and guru purchases

Another key factor to TRW’s strong performance, was the restructuring effort the firm made over the past years. This led to debt being reduced drastically, and thus, to lower capital costs, while improving returns on invested capital significantly. ROIC is currently at 45.5%, while return on equity is at 28.2%, far above the industry average. With EPS growth estimated to be 148.5%, this stock offers shareholders growth opportunities like no other in the auto parts sector. Much of this growth will be delivered by a huge backlog of fresh business deals, along with stricter safety regulations worldwide, and technological innovations. In this favorable climate, the firm expects revenue to grow by 5% annually.

In addition, investment guru Richard Pzena recently bought 2,985,869 shares of TRW, and Ken Heebner also added the stock to his portfolio. Considering the stock is still trading at 8.9 times its trailing earnings, at a 43% price discount relative to the industry average, shares are actually quite cheap at the moment. Hence, entry at this point could prove wise for those seeking a solid value investment in the auto parts industry.

Disclosure: Patricio Kehoe holds no position in any stocks mentioned

About the author:

A fundamental analyst at Lone Tree Analytics

Rating: 4.0/5 (4 votes)


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