What Should You Do With TRW After Huge Insider Selling?

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In the past six months, insiders of TRW Automotive (NYSE: TRW) have sold more than 10.3 million shares of the company in 13 transactions. Notably, its Chairman and CEO John Plant has sold more than 101,000 shares of the company since the end of Feb. 24, with the total transaction worth of around $5.9 million. Blackstone Group also sold more than 9.2 million shares in the company for nearly $545 million. Should we turn bearish about this company along with these insiders? Let’s take a closer look and find out.

Business snapshot

TRW is one of the largest global suppliers of automotive systems, modules and components to global automotive OEMs and related aftermarkets, operating in four main business segments: Chassis Systems, Occupant Safety Systems, Electronics and Automotive Components. The majority of its revenue, $10.32 billion, or 62.8% of the total 2012 revenue, was generated from the Chassis Systems segment, while the Occupant Safety Systems segment ranked second with $3.28 billion in revenue, or 20% of the total sales, while the Electronics and Automotive Components segments generated $1 billion and $1.8 billion in revenue, respectively.

In terms of geographical regions, TRW derived the majority of its revenue, 42.5% of the total revenue, from Europe, while North America was the second biggest revenue contributor, accounting for 36.1% of the total sales. The company had quite a concentrated base of customers that are automotive OEMs. The four biggest OEMs customer groups are Volkswagen (23.5% of sales), Ford (17.6%), Chrysler (10.4%), and GM (10%).

Cash generation with reasonable leverage

Since 2009, TRW has experienced a decent growth in both revenue and earnings. Its revenue increased from $11.6 billion in 2009 to $16.4 billion in 2012, while the net income shot up significantly from $55 million to more than $1 billion during the same period. In 2012, the operating cash flow was $956 million and the free cash flow was $333 million. TRW employs a reasonable amount of leverage in its operations. As of December 2012, it had nearly $3.6 billion in total stockholders’ equity, $1.22 billion in cash and around $1.34 billion in both long and short-term debt. In addition, it also recorded nearly $1.3 billion in pensions and other benefits.

Peer comparison

What makes me interested is the company’s low valuation. At around $55 per share, TRW is worth nearly $6.6 billion on the market. The market values TRW at only 4.6 times EV/EBITDA. Compared to its peers, including Delphi Automotive (NYSE: DLPH) and Autoliv (NYSE: ALV), TRW has the cheapest valuation. Autoliv, at $68 per share, has a total market cap of nearly $6.5 billion. It is valued a bit more expensively than TRW at 5.85 times EV/EBITDA. The biggest company among the three is Delphi, with around $13.6 billion in total market cap. At around $43 per share, Delphi has the most expensive valuation at nearly 7 times EV/EBITDA.

Indeed, Delphi seems to deserve the highest valuation due to its highest operating margin and highest return on invested capital. Delphi’s operating margin is the highest among the three at 10.7%, while the operating margin of Autoliv is nearly 9.5%. TRW generates the lowest operating margin among the three, at only 7.15%. The return on invested capital of Delphi is nearly 22.4%, while the ROIC of TRW is around 18.94%. Autoliv generates the lowest return on invested capital at only 10.8%.

Income investors might like Autoliv the most due to its highest dividend yield of 2.9%. Delphi only pays investors dividends with a yield of 1.6%, whereas TRW does not pay any dividend.

My Foolish take

With a global manufacturing footprint, long-standing customer relationships with big OEMs customers, consistent cash generation and a low valuation, TRW could be a good stock to hold in a long run for investors. 


Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Autoliv. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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