The Wall Street Transcript Publishes Automobile & Auto Parts Industry Issue
15 July 1999
The Wall Street Transcript Publishes Automobile & Auto Parts Industry Issue
NEW YORK, July 14 -- Leading analysts examine the Automobile
& Auto Parts sectors in the latest issue of The Wall Street Transcript. In a
vital review of this sector for investors and industry professionals, it
features:
1) In an in-depth roundtable forum on the Automobile & Auto Parts sector
(14,800+ words), four leading analysts: Philip Fricke of CIBC World Markets,
Nicholas Lobaccaro of Lehmen Brothers, Matthew Stover of PaineWebber and
Ronald Tadross of Prudential Securities examine the DaimlerChrysler merger,
interest rate concerns, net margins, e-commerce potential, sales outlook,
competitive picture, technological advances, M&A future, capacity issues,
management performances and investor concerns.
The Internet may make its most important contribution to the sector on the
distribution side. Stover declares, "Volvo estimates that when
it gets down to financing, marketing and distributing the product, that can
account for as much as 55-60% of the total cost of turning raw materials into
the car that we drive. This is a much larger nut than the 13-15% tied up in
direct labor. Therefore, it needs to get more attention than it has had in the
past. Technologies like the Internet become enabling events that should allow
the vehicle manufacturers (VMs) to significantly rethink their distribution
system."
Innovations in computer aided design (CAD) technology have created the
potential for drastically reduced development times. Fricke asserts, "The
General Motors Corporation, on the basis of everything I hear from suppliers,
is on the verge of making some important changes in design time and
development time so that they will be able to develop drivetrains. I'm not
going to give any exact numbers. Some of it is competitive and proprietary.
But we are probably going to see at General Motors, within a very short period
of time, a quantum leap in the speed at which they can develop drivetrains.
And this comes from parts suppliers."
There's a very wide variance in profitability by segment. Lobaccaro
states, "You lose money hand over fist with small cars; with SUVs and luxury
vehicles, you make quite a bit of money. When you look at it, DaimlerChrysler
and Ford have a huge product mix advantage over GM
. Then you have to take the next step and look at the product
pipeline. You don't see any slowing down of Ford's and Daimler's product
momentum, so they're going to continue to be very strong. We have a little bit
of a lull, but once we get into 2003 or 2004, GM will begin to play catch up
pretty quickly."
Overcapacity is a major issue with sector analysts. Fricke says, "This
industry today has obscenely high costs. I think that is an element or factor
that Wall Street has not fully recognized, just how high costs still are. We
talk about overcapacity in the industry. That discussion tends to be focused
on final assembly capacity. Overcapacity goes far beyond that and is far more
severe. There is tremendous overcapacity in engineering. There is phenomenal
redundancy, duplication of effort. There is overcapacity in distribution,
marketing and sales throughout the entire system."
Fricke continues, "The investment point here is that for everyone in this
industry, there is extraordinary opportunity to lower costs. And I would
emphasize that it's a win/win situation; it's a win for automakers and it's a
win for parts suppliers alike. For the automakers, they will gradually improve
the efficiency with which they use capital. As they adopt more sophisticated
techniques for engineering and design and allocate the parts companies,
they'll get more bang for the dollar. And as there is further consolidation,
economies of scale play a more important role. What this suggests to me is
that Ford, General Motors, and DaimlerChrysler of 2004 and 2005 will be
significantly more profitable than they are today, fundamentally so. Taking
mix out of the equation, taking the cycle out of the equation, they will be
fundamentally more profitable in 2004 and 2005, Ford in particular. I think
Ford can achieve far greater cost reduction in the future than it has in the
past."
Consolidation is also a vital theme for auto parts suppliers. Although the
driving reason for consolidation has evolved from merely pricing concerns to
the pending implementation of manufacturers selecting suppliers to construct
entire modules rather than merely supplying parts. Tadross states, "The
companies that are consolidating have a path to build capabilities to deliver
certain modules."
Stover concurs, "Lear Corporation , Tower , Dura
and Borg-Warner have pursued acquisitions that have
not gotten too far afield as they relate to their core businesses or the
evolution of their core businesses. They've historically been companies that
have done deals that are accretive to investors. And I think that as we look
at the evolution of the industry and at suppliers trying to assemble modules,
they become important companies as you see various modules develop. The reason
we're recommending these companies is they have focused strategies, they've
been in fairly relevant component groups, they've done deals that have been
accretive to investors and the companies really keep a constant vigilance at
reducing costs."
2) A review of management performance at 18 Automobile & Auto Parts firms
asked market insiders about the ability of management teams to create
shareholder value. Some management teams received harsh reviews for ignoring
shareholders' interests, while several CEOs merited applause.
John Blystone, CEO of SPX Corporation , receives accolades,
"John Blystone, has done a tremendous job. The stock quadrupled over a three-
year period. Blystone executed properly with good strategy, and got the
operating results up tremendously. He brought in some good management around
him as well."
John Fiedler, CEO of Borg-Warner, receives praise from a buysider, "John
Fiedler is very impressive at Borg-Warner. He brings a disciplined financial
approach to acquisitions, and is not afraid to sell businesses. The management
team is focused on improving shareholder value in core competencies of their
company."
William Hunt, CEO of Arvin Industries, garners top marks from an industry
analyst, "Arvin has done a great job, especially CEO Bill Hunt, tiptoeing into
the after-market. He has done a better job than anyone in getting the
financial performance out of the after-market than most people thought you
could get. Just a great job."
J.T. Battenberg, CEO of Delphi Automotive , earns commendations
from an industry veteran, "Hats off to J.T. Battenberg for this year. He has
done some things from a hiring standpoint, filled in some gaps and has
attempted to change the culture at Delphi. Battenberg probably faces the
toughest challenge in the industry, to put a new face on GM's parts business."
Richard Snell, Chairman of Federal-Mogul , secures acclaim from
a specialist, "Dick Snell basically came into Federal-Mogul two and a half
years ago when the company was a mess, the laughing stock of Detroit. He
basically restructured some of the businesses, focused the company back on
manufacturing, and went out and made three substantial acquisitions to really
reposition the company for long-term growth. And it's one of the more
exciting growth stories now in the auto supplier group."
Fred Bauer, CEO of Gentex , gains plaudits from a buy sider,
"By far, Gentex has been the best performing stock, and has probably one of
the best management teams in terms of thinking about returns. They have the
highest return on capital in the group, highest growth rate, everything." A
colleague concurs, "They're growing the company by leaps and bounds and
increasing the shareholder value at the same time, and all while doing it from
a very conservative financial base."
But another sector Chairman is lambasted by a financial advisor, "(He)
hasn't done anything for his shareholders in years." An analyst concurs, "It's
just a good example of a management that really is not shareholder friendly."
3) A detailed CEO Interview (3,000+ words) with V. William Hunt, CEO of
Arvin Industries , in which he discusses the recent acquisition of
Purolator Filter Group, sales goals, cost reductions and the outlook for his
firm.
Detailing his streamlining efforts, Hunt states, "Since 1995, our earnings
have grown at a 44%-annual compounded rate and our sales at an 8%-annual
compounded growth rate. Our earnings have been outstripping our sales by over
five times, and we think the primary, if not exclusive, contributor to this is
the cost-reduction machine that we've created."
To obtain a copy of this issue, see http://www.twst.com/info.htm or call
212-952-7433. This special section is also included in the INDUSTRY/SERVICES
Sector of TWST Online at http://www.twst.com/subscribe/indust.html.
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