Sputtering Auto Industry Chokes Suppliers - Barron's

With Chrysler in bankruptcy and General Motors (GM) on the rocks, extended plant shutdowns are bad news for parts suppliers. Investors have largely shrugged off the dangers, but Barron's Jay Palmer suggests anyone who has made a sizable gain in the sector might want to think about pulling out.

Neil De Koker, CEO of the Original Equipment Suppliers Association, has warned that hundreds of parts suppliers will go under in the next four months unless the industry gets help, with as many as 100 failing within 60 days. Another 500 are at high-risk for failure within the year. The $5B of federal aid extended thus far falls short of the $20B that De Koker's association says is needed to avert a crisis.

The failures have already begun: Nobel International (NOBL) filed for Chapter 11 last month, and Delphi (DPHIQ.PK), the second-largest North American supplier, is also bankrupt. Of the publicly traded major suppliers, those trading below $5 are considered most at risk. This group includes Lear (LEA), Stoneridge (SRI), Dana (DAN), ArvinMeritor (ARM) and American Axle (AXL).

Canada's Magna International (MGA) is among the stronger companies and is the largest North American supplier. However, a run-up in its stock makes it look pricey and S&P put Magna on its credit watch list with negative implications. Also on the watch list is Johnson Controls (JCI), Cummins Engine (CMI), and TRW Automotive (TRW).

• Himanshu Patel, of JPMorgan Chase, believes "the odds of some [more] major bankruptcies among the suppliers in coming months are high. More than a handful have very stressed liquidity, and a good many fortunes are tied to GM and Ford." Patel is largely bullish on Continental (CTTAY.PK), which is benefiting from the fall in raw-materials prices. However, the good news may already be reflected in the company's ADRs, which jumped to $28.75 from a February low of $14.75.

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• The domino effect on parts suppliers has extended beyond North America and is hurting the U.K. and Europe too.
• With Detroit in disarray, several Japanese parts makers have applied for the U.S. government's relief program for auto parts and materials suppliers of GM and Chrysler.

Comments

[prudentinve...:]

Thanks for the heads-up.

JCI, while very exposed to autos, stands to gain from the stimulus spending on the greening of Federal Govt. buildings, as well as various other stimulus on energy savings. However, anyone sitting on profits in JCI would be reasonable to take some off the table at around $20 (I did).

My take on CMI is that their exposure is mostly to the truck and heavy equipment market, rather than autos. However, I've been watching it and consider it overpriced.

You have not mentioned Modine (MOD). A few weeks ago, they renegotiated terms with major lenders and moved back off the brink. Do you have any insights on its current prospects?

I would expect CMI & MOD to gain some benefits from energy stimulus, although to a lesser extent than JCI.

Disclosure (Long positions in JCI and MOD, none in CMI).

May 10 09:32 AM

[jarco:]

With GM now down to three brands, Chevy, Caddie, and GM trucks,
stronger US dollar coupled with supplier woes should bode well for certain foreign manufacturers. Assuming they have local-to-them supply chain unaffected by the US domestic market, availability of upper end BMW, Mercedes, Lexus, etc. models will hurt GM Cadillac sales.

Honda, Toyota, and to a lesser extent Nissan should have sufficiently deep pockets to either buy-out broke suppliers or at least keep them alive as their sales increase to take over what little GM and Chrysler sales void is created. Neither will be missed, in my view.

May 10 09:46 AM

[Windsun33:]

The recent super runup in AXL is a good example that what is happening is beyond reason - all based from what I can find out, on a buy recommendation from a SINGLE analyst. Went from ~1.60'ish to over $4 in one day - yet looking at the fundamentals it was too high at $1.60.

At least JCI has less exposure to the auto market than most others mentioned - but even there, much of the recent JCI runup has been due to the hype over battery development for "green" electric vehicles (which I think is also due for a rude awakening soon).

May 10 12:36 PM

[redbaron:]

I also would like some comments on MOD, as I am long that stock. I also own JCI, and previously owned CMI, having sold it with a 50% gain. I would also like the authors comments on whether some of these suppliers are going to benefit from the after-market replacement parts, as some cars are driven further requiring more parts replacement. If so, which stocks would be the largest beneficiaries.

May 10 03:00 PM

[Jasper M:]

This turned out to be one of the more immediately practical articles I have read here lately. Good job, thank you.
And good comments, too.

May 11 05:56 AM

[Glen L.:]

I have a good friend who owns a company that supplies American car dealerships. He's very worried that the closing of GM and Chrysler dealerships will put him out of business this year.

As someone who is 100% anti-bailout, I'm opposed to him getting any taxpayer help, and so is he. But since the automakers themselves have received their billions, the immorality is two-fold: immoral to steal from the taxpayers to prop them up, and immoral to prop them up and not him. I guess he's just too small to succeed.

May 11 02:25 PM

[User 37393:]

This is in reply to "jarco's" comment that "neither Chrysler, nor GM will be missed".
I don't know in what Country he/she lives but if it happens to be the USA, then the comments made are totally out of line.
It was the Automakers who soon after the USA went to war their factories began making the much needed war material, supporting and facilitating the victory that came with having the right tools at the right time with the RIGHT quality.
It was also the contribution of the American Automakers, that put in business the now shinning stars of the Far East; Honda, Toyota, Izusu, Hunday, et all, they COPIED the existing American cars and did not have to pay the cost nor the time of research how to make them.
I acknowledge that during good times the Automakers did not make sound business decisions on Labor, design or marketing but isn't hind sight wonderful???
To say that our industrial strength will be un-touched if we loose these manufactures is beyond ignorance.

May 11 04:22 PM

[satyr:]

As with so many articles, a little too broad brush for my taste. No doubt, some suppliers will go under, which will cause some disruption. The turmoil is going to ripple through for a long while

Keep in mind that many parts suppliers do more than make widgets for GM & Chrysler, and even go beyond passenger vehicles. They are taking a hit, too, due to a weak economy, but don't have all of their bets riding on what happens in Michigan.

In particular, I think the comment about companies whose stocks are trading under $5 being most at risk is irresponsible. What sort of analysis is that? Take a look at ARM, for example. Things would have to get much worse to drive them to the brink.

May 11 04:32 PM