Stoneridge, Inc: Retooling the Tin Lizzie
It isn’t every day that analysts don’t budge from “hold” ratings on a company that exceeds—yet again—quarterly financial expectations, gets praise for execution and is capitalizing on growth potential. But such is the case with Stoneridge, Inc. (NYSE: SRI), where dismal industry dynamics have analysts waiting patiently on the sidelines.
And wait they will, for Stoneridge is steering clear of wreckage: it makes electrical and electronic components and systems for autos, medium to heavy trucks and agricultural and off-highway markets. As U.S. vehicle production dives, so do sales and profits for many who supply parts. A study released May 17 by BBK, an international business advisory firm in Southfield, Mich., said one-third of North American suppliers were at some level of financial distress. There are more headlines for hard times than there are profitable bottom lines.
Except for Stoneridge. Early this month, the Warren, Ohio-based company reported sales increased 3% to $185.0 million in the first quarter ended March 31. Net income rose to $0.21 per share, up from $0.16 per share for the same quarter last year—the fourth consecutive quarter in which the company beat earnings expectations.
Stoneridge also stayed with its 2007 earnings guidance of $0.45 to $0.55 per diluted share, which already includes expectations for a 25% to 35% decline in North American light vehicle and commercial vehicle production in 2007. In 2006, Stoneridge earned $0.63 per diluted share.
John Corey, CEO of Stoneridge, said on a conference call following release of the quarterly results that the vehicle market was trending toward the lower end of that production decline range of 25% to 35%. He indicated Stoneridge now looked for the drop in output to bottom out in the second half of the year, not the second quarter, as many had previously expected. There is also the question of whether European demand can continue strong later this year; Corey said high copper prices also could pressure Stoneridge’s performance in the third and fourth quarters, although the company has hedged one-third of its exposure.
Granted, Stoneridge’s quarterly profit was due notably to friendly currency exchange, better-than-expected vehicle markets in Europe and healthy returns from its joint venture in Brazil. But here lay the longer-term benefits to Stoneridge, too: through global expansion, management is taking advantage of stronger markets elsewhere, shielding itself from Detroit’s woes. The BBK study showed that no Asian suppliers were in distress, as were only 14% of European suppliers.
Stoneridge has 17 manufacturing and design centers, and 14 sales and engineering support offices around the world. Its joint ventures are in South America and India, and it operates offices in Japan and China. The company wants to expand and is not shy about it. “That is one of the areas that we’re looking at,” said Corey on the conference call. “We’re evaluating these things now.” He said the right acquisitions would be complementary in product and geography.
Not only are vehicle buyers splurging in other parts of the world, but they also want cars Henry Ford didn’t imagine when he introduced mass production with the Model T. According to various reports from the Shanghai car show in late April, China’s buyers — the fastest growing group of auto buyers in the world — are demanding more custom, technologically advanced vehicles. Their tastes aren’t for messy gas-guzzlers but for refined rocketry, with luxury. They are to clean cars what Mr. Ford was to the tin lizzie.
Clearly, the use of electronic systems that improve performance and safety will continue to grow. Stoneridge offers next-generation technology for both high-volume and custom-vehicle manufacturers, and is continuing to work on actuators and sensors, which include chemical sensors for diesel engines. Longer term, this company is set for growth.
Someone’s gotten the news. Stoneridge carries a P/E near 25 based on 2007 earnings of $0.50, the middle of the guidance range. The company’s shares have gained 55.8% in the past 52 weeks, outpacing the industry gain of 18.2% and the S&P 500 advance of 28.4%. Stoneridge, with market capitalization of $300 million, settled Friday at $12.34, near the 52-week high of $13.87. The low is $6.55.
David Leiker, analyst at Robert W. Baird and Co., said in a research note after first-quarter earnings that management continues to improve its business. Leiker said he sees “potential growth opportunities from emissions requirements and new sensors, as well as continued geographic expansion.” Current valuation, though, seems to already reflect improved fundamentals, and he maintained a neutral rating, looking to be a longer-term buyer at $10.
The balance sheet also needs careful monitoring. For instance, working capital was $86.6 million at the end of March, up 10% from a year ago and up 24% sequentially, mostly a result of higher inventories. “Working capital improvement, particularly inventory, remains one of management's top priorities,” said Leiker in his research note.
And Jonathon Steinmetz, analyst at Morgan Stanley and Co., held to his underweight rating for Stoneridge shares — and to a cautious industry view — in a report after first-quarter results. He noted the strength in the Latin American market but said he was concerned about cash flow and the weakness in the company’s core business: commercial vehicles and North American light vehicles.
Steinmetz also cited high valuation compared to peers such as PACCAR Inc. (Nasdaq: PCAR) a $21-billion company that trades near 15.5x his 2008 earnings estimate, and ArvinMeritor, Inc., (NYSE: ARM), a $1.4-billion supplier also near 15.5x expected 2008 earnings. Stoneridge is valued closer to 21.0x his expected 2008 earnings of $0.60.
But based on management’s impressive execution — both to outrun the industry’s near-term troubles and to position for the future — that valuation may be justified. And a buying dip to $10 per share would be a ticket to ride.
