With Chrysler in bankruptcy and General Motors (NYSE: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 (OTC:DPHIQ), 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 (NYSE:LEA), Stoneridge (NYSE:SRI), Dana (NYSE:DAN), ArvinMeritor (ARM) and American Axle (NYSE:AXL).
Canada's Magna International (NYSE: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 (NYSE:JCI), Cummins Engine (NYSE:CMI), and TRW Automotive (NYSE: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 (OTCPK:CTTAY), 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.