Looking for Another Way to Benefit From Auto Sales? Watch This Stock

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

TRW Automotive Holdings (NYSE: TRW) supplies components, automotive systems, and modules to automotive OEMs and related aftermarkets. Three major customers of TRW are Ford, General Motors, and Volkswagen AG, with these three together accounting for nearly 50% of its revenue.

In addition, TRW’s products also find their way to Europe and Asia through OEMs and independent distribution networks. With the auto market being on a good run in the U.S. and TRW having some of the most well-known car makers as clients, it isn't surprising that the company has been doing well and is up 40% this year.

TRW posted its second-quarter results recently and it beat consensus estimates on both revenue and earnings by an impressive margin.

Revenue & earnings

The automobile sector is seeing growth in general and this is definitely good news for all auto ancillary/component/technology suppliers. For example, General Motors' biggest market is now China, as in the last quarter, it sold more vehicles in China than in the U.S. TRW got its share of the pie and as a result, its quarterly revenue grew 6.5% to $4.5 billion.

Needless to say, this jump was facilitated by higher volumes of vehicle production in North America, China, and Brazil. Also, TRW’s innovative technologies were in strong demand. The company beat consensus estimates by $100 million on revenue, which is not a small figure by any means. This is despite weak signals from the automotive industry in Europe.

Operating profit (before special items) stood at $386 million and is definitely a matter to cheer about, as this is the highest 2Q profit ever generated in its entire history. Increased sales volume was the primary driving factor behind the $47 million increase in operating income on a year over year basis, which was partly offset by a scheduled increase in costs to support future growth of the company.

TRW also reported an increase in earnings of 17.4% to $2.02 per share as compared to $1.72 in the year-ago quarter, and this beat consensus estimates of $1.70. 

Prospects

Production of light vehicles in North America is expected to continue rising, reaching 17 million units by 2015, which in June 2013 stood at 15.9 million units. This, by far, is the highest number reached since December 2007.

China currently is turning out to be a strong opportunity. For the first half of 2013, unit sales increased an impressive 17%. Passenger car sales in June grew 12.3% and Ford was on a roll in China in June, primarily because of its new models. General Motors is already selling more in China than in the U.S.

European market conditions are stabilizing and this also will have a positive impact on the auto industry. One promising indicator for the future is that the rate of decline in registrations moderated sequentially in Q2 compared with the first quarter, suggesting that demand in the region may be stabilizing, although at lower levels. The continued decline has stopped.

World Bank in its report had also mentioned that the world economy in general will be less volatile and has a bullish opinion on growth of economies of the U.S. and Japan as compared to the BRIC nations, which has been revised downward due to expected slowdown in China and India.

TRW also spends on innovative products so as to ensure sustained growth. It recently started production of 'AC100' 24 GHz forward-looking radar based on the new PSA platform ‘EMP2’ and is a valuable product addition/enhancement to the ‘DAS’ -- Driver Assisted System -- business of the company. The company expects the fitment growth of this technology to be phenomenal as governments globally try to reduce road fatalities.

All in all, with the future of automobile industry looking good and product innovations/improvements from TRW, the company should perform well.

Competitors

TRW competes with Autoliv (NYSE: ALV), Delphi Automotive (NYSE: DLPH) and a few privately held companies.

Autoliv reported its results for the second quarter last month and it beat consensus estimates on both revenue and earnings. Consolidated revenue increased 5.2% to $2.19 billion, beating consensus estimates of $2.17 billion. The year over year increase was primarily driven by increasing importance given to safety by prominent Chinese car manufacturers.

Operating income of the company grew 1.9% and stood at $194 million. Organic sales went up 6% and company ended the quarter with an EPS of $1.44, which beat the consensus estimate of $1.39. As the largest supplier of automotive safety equipment globally, Autoliv has an excellent track record of profitability, which is driven by high customer switching costs and innovative product launches year after year.

Delphi needs no introduction to anyone who has been associated with the automotive industry because it is a leading manufacturer and supplier of electrical and electronic, powertrain, safety, and thermal technology solutions for the automotive, commercial vehicle, and other market segments.

As you would see, it is not just dealing with just automobile safety related products. It is just one of the segments that Delphi caters to. Here’s an interesting Q&A with Delphi on “Advanced Driver Assistance Systems.”

Just like TRW, Delphi also has considerable exposure to the European market. This has not been good in 2013 for Delphi, where quarterly revenue and earnings fell 17% and 15%, respectively, to stand at $4 billion and $0.88 per share, with weakened demand from Europe being a key contributing factor.

For the year 2013, Delphi estimated that EPS will see an 11% growth year over year on the presumption that global automobile production would see an increase of 2% and decline in Europe of 5%.

Conclusion

With a booming auto market and having a list of strong clients, one can easily expect TRW to get better in the future and continue appreciating. What's more attractive is that TRW still trades at a cheap 9 times earnings even after appreciating so much. Given the prospects it has, I believe that it is a sweet deal even at these levels.

China is already the world's largest auto market -- and it's set to grow even bigger in coming years. A recent Motley Fool report, "2 Automakers to Buy for a Surging Chinese Market," names two global giants poised to reap big gains that could drive big rewards for investors. You can read this report right now for free -- just click here for instant access.

 


ANUP SINGH 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!

blog comments powered by Disqus