Is TRW Automotive a Buy?
Soroush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In 2012, shares of TRW Automotive Holdings (NYSE: TRW) have returned more than 30%, outpacing the the auto parts industry average (-1.38%), and peers like Illinois Tool Works (NYSE: ITW), Eaton Corp (NYSE: ETN), and Autoliv (NYSE: ALV). Predominantly a manufacturer of automotive safety systems, the company also supplies braking and steering components to its clients. Accounting for nearly half of the TRW’s total revenue are three major automakers – Ford, General Motors, and Volkswagen – though the company has placed a recent focus on diversifying this clientele. At present, TRW Automotive has operations in nearly 30 countries, with some of its newest facilities being built in China. Here’s an interesting look at what another firm is doing in this promising region.
Since the recession, TRW has grown its revenue by an average annual rate of 13.5%, which is more impressive than industry norms (6.3%) and the likes of ITW (10.1%), ETN (12.1%), but less than that of ALV (20.8%). In terms of efficiency, operating (7.3%) and net (6.2%) margins above the industry averages (7.1%, 4.4%) have allowed the company to produce exceptional annualized EPS expansion (469.9%) over the past three years.
From a valuation standpoint, it appears that investors have yet to catch up with this otherworldly earnings growth, as shares of TRW are currently trading at a price-to-earnings ratio (5.3X) below the industry average (9.4X), ITW (14.0X), ETN (10.6X), and ALV (10.3X). Moreover, this is also below the stock’s own 5-year (16.4X) and post-IPO (22.7X) historical averages. In fact, since going public in 2004, TRW’s earnings have historically traded at a 41% premium relative to those of the S&P 500. This year, however, they appear much cheaper, trading at a 64% discount.
Interestingly, the company has grown its operating (29.5%) cash flow at a solid annual rate over the past three years, though the stock still trades at a price-to-cash flow ratio (6.1X) below the industry average (8.1X) and its aforementioned competitors: ITW (12.8X), ETN (9.6X), ALV (6.6X). When this growth is factored into the equation, we can see that TRW trades at a paltry PCFG ratio of 0.2; typically any figure below 1.0 signals undervaluation.
Just as we’ve covered in our analysis of Joel Greenblatt’s Magic Formula approach (seen here), it’s also important to determine a company’s return on invested capital, or ROIC, and its EBIT/enterprise value ratio. The EBIT/enterprise value ratio measures the earnings potential of a particular stock, while a high ROIC indicates that a particular company has a leg-up on its competitors, whether in the form of a unique product, brand loyalty, or governmental support. In TRW’s case, its strength is predominantly brand loyalty, as it has the unique combination of a strong ROIC (25.7%) and EBIT/enterprise value (22.1).
On July 31st, the company reported its second quarter results, coming in with earnings of $1.72 a share, beating the Street’s estimate of $1.54 a share. From a year-over-year standpoint, this still represented a decline of 13.5%, however, as 2011 Q2 EPS was just under $2.00. By year’s end, TRW is expecting its top three clients to have produced a total of 14.9 million units in North America, and 18.8 million units across the pond, in Europe. If these forecasts hold, production volume would be up around 6% from 2011 levels. Consequently, analysts are predicting the company to finish 2012 with an EPS of $5.92, with a 9.3% growth in 2013 to reach $6.47 a share.
If TRW Automotive meets these expectations, fairly valued shares of the stock can eclipse $60; they currently trade in the $42 range. WealthLift’s Sentiment Index rates TRW as a buy, with the majority of the community’s users placing an “overperform” rating on the stock. For more trading ideas in today’s uncertain market environment, visit WealthLift INSIDER.
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