Visteon Corp. (VC) is an automotive supplier that designs and manufactures various aspects of the interior of many next generation automobiles. The company is a leader in its field, producing high quality products and building strong relationships with their customers. For example, Volvo (GM:VOLAF), still a stalwart symbol of quality and safety in the automotive industry, recently recognized Visteon Corp. with Volvo Quality Excellence status, as Hyundai (GM:HYMLF) bestowed an innovation award to the company in March of this year. While Visteon prepares to announce earnings later this week, investors should consider their entry points into their new or growing positions with this stock.
To trade earnings, it is important to not focus on any one factor, but the synergy of events and data leading up to the announcement. Relevant and measurable details such as those below, if analyzed effectively, can increase the likelihood for the investor to blow the earnings trade out of the water. After reviewing several important factors for an earnings trade, a few good companies immediately generated interest, but the one really great opportunity stands out. Visteon Corp. will report on May 9th, and as of close on Tuesday May 7th, the stock looks very attractive under $60.
Strong Transportation Sector, Strong Automotive Industry
There are several reasons to look at Visteon as a great earnings trade. First, the automotive industry in the U.S. has been very strong and has made significant contributions to the strength of the iShares Sector ETF for the Transportation Sector (IYT). Kansas City Southern (KSU) is the second largest holding in the IYT and the company cited automotive strength as it beat expectations last month. Union Pacific (UNP) benefited from the increase in volume and demand in automotive. On its last announcement UNP cited a 13% increase in revenues directly attributable to this automotive industry strength. The IYT is up over 22% over the past twelve months as of Tuesday's close. The automotive industry and the transportation sector are giving investors clues into the future with current strength. Should momentum continue to strengthen as the economy strengthens in the United States, the environment will catalyze business at Visteon Corp, an industry leading supplier.
Strengthening U.S. Economy
Despite big moves already in the IYT, as well as the Dow and S&P 500, it seems there is a great deal of upside left in U.S. equities as the Federal Reserve continues to support low rates and improving unemployment. QE3 continues as well as Operation Twist, the Federal Reserve continues to inject liquidity into the economy at the rate of $85 Billion a month. While many concern themselves with how the Fed will unwind their easing positions, QE3 is apparently here to stay for the foreseeable future.
Recent labor data for April and upward revisions to previous data sets for February indicate that the economy is improving as the Federal Reserve expected yet they are continuing to support the economy. Macroeconomic data that supports personal income through greater levels of employment is naturally bullish for the already hot automotive industry. Visteon is a growing part of the new car supply chain in America and stands to benefit nicely from American economic improvement.
In a recession environment, most consumers tend to make do with old equipment and make minimal repairs and replacements. But in a post-recession environment, as the economy improves, consumers start to realize the demand that has accumulated. This is why so many regard the transportation sector as a leading indicator for the overall market. Intuitively, if consumers can more frequently afford major purchases such as cars or houses, especially new assets, then an investor could assume that the economy is improving. Vehicles are still aged in this country and the earnings beats in the IYT show that consumers are finally starting to become more confident in their ability to make these new purchases.
Value at Visteon Corp.
Given the momentum in the transportation sector, investors should narrow their focus to this undervalued automotive interiors company which is nicely positioned to benefit from the automotive industry strength. Visteon is indeed undervalued and a brilliant earnings trade. Of course there are some that would disagree about the value but Visteon has a forward price to earnings multiple under 14.47 and that is value for this strong growing company. The company is expected to report quarterly earnings for the period ending March 2013 of $1.15 per share on May 9th, according to thestreet.com. If met, Visteon will have nearly doubled quarterly EPS over the same period a year prior.
The chart reflects the nice gains posted in August 2012 but also highlights the recent disparity between the IYT and Visteon: VC up only just over 11% YTD while the IYT is up over 21% YTD. While Visteon has a promising shot at beating estimates, it is supported by the sector strength and real organic earnings growth if they happen to miss consensus estimates. The next quarter is not expected to be great, down over the prior year and that represents another opportunity for buyers. With low expectations, guidance stands to improve rather than deteriorate given the growth in the sector and positive environment for Visteon.
Visteon is a lucrative investment heading into earnings given the environment for stocks, incremental improvement in the automotive industry and transportation sector, and strong company guidance. The earnings multiple should remain high as company guidance stands to improve. With Visteon continuing to win relationships and increase sales, the strong multiple will be validated going forward. Given guidance and growth potential, earnings multiple support, an appropriate price for Visteon in the current environment would be nearer to or over $70, over a 17% increase over Tuesday's close with guidance of continued long term growth buying Visteon seems to be a great investment as well as a great trade heading into earnings.