Windy City Stocks: Auto Industry

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Includes: FSS, LKQ, NAV, TEN
by: Stan Stafford

Introduction

Last week, I wrote Part 1 of this article in which I listed and reviewed five stocks in the transportation industry. Each of the stocks reviewed belong to companies headquartered/based in Chicago or its surrounding suburbs. For Part 2 of this article, I will be focusing on stocks in the automotive industry.

While Detroit, even in its current bankrupt state, is referred to as Motor City, Chicago has a number of companies that operate in the automotive industry. While these companies are not part of the Big Three, they do have a significant impact in the industry, each performing unique functions. As in Part I, I will look at each company's history, financials, earnings, growth, current valuation, stock movement, and future outlook. I will not be ranking the stocks against each other, but will look at them separately as to whether I find them to be a Buy, Hold, or Sell in terms of long-term holdings.

Stock #1

Federal Signal Corporation (NYSE:FSS) designs, manufactures, and sells a wide range of products and solutions for municipal, governmental, industrial, and commercial customers throughout the United States, Europe, and Canada. It's products include first responder interoperable communications, emergency vehicle systems, vehicle lightbars and sirens, public warning signs, aerial platforms, street cleaning vehicles, and vacuum loader vehicles. FSS was founded in 1901 and is headquartered in Oak Brook, Illinois.

Financial Performance

Profit Margin (Trailing 12 Months) 12.96%
Return on Assets (Trailing 12 Months) 5.51%
Return on Equity (Trailing 12 Months) 18.98%
Revenue (Trailing 12 Months) 825.10M
Revenue per share (Trailing 12 Months) 13.22
Quarterly Revenue Growth (Year Over Year) 8.90%
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FSS has struggled to see any kind of long term growth in revenue. The company still hasn't gotten back to its revenue/profit levels of ten years ago. In 2003, FSS reported revenue of $1.06B and gross profit of $289M. Last year, FSS reported revenue of $803.20M and gross profit of $189.80M.

Current Valuation and Recent Trading Activity

FSS has a current price to earnings value of 6.88x and a price to sales value of 0.89x with earnings per share of $1.70. FSS closed Friday at $11.67, slightly lower than its 52-week high of $12.00, and much higher than its 52-week low of $5.08. FSS is currently trading above both its 200-day and 50-day moving averages.

Earnings

Last quarter, FSS reported earnings per share of $0.23, a $0.09 beat and $0.08 higher than the same period last year. FSS has a 60% one year earnings growth rate, but a negative five year earnings growth rate.

Company Outlook

In FSS's Q2 report, the company saw increased margins and less expenses as a result of refinanced debt that reduced interest by 62%. FSS has seen strength in industrial orders and positive jumps in the company's Environmental Solutions Group and Fire Rescue Group.

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As you can see from the chart above, the price of FSS has moved in line for the most part with the company's EPS. With FSS's strong Q2 results and recent improvements, I think FSS is on the right track. FSS has reported increased guidance for the remainder of the year, and I believe that FSS's stock will continue to rise as long as FSS can meet its raised expectations. At its current price, I consider FSS a buy.

Stock #2

Navistar International (NYSE:NAV) operates in three industry segments: truck, engine, and financial services. NAV's truck segment produces medium and heavy trucks, including school buses. NAV's engine segment designs and manufactures mid-range diesel engines. The company's financial services segment consists of its domestic and international insurance subsidiaries. NAV was founded in 1902 and is headquartered in Lisle, Illinois.

Financial Performance

Profit Margin (Trailing 12 Months) -26.87%
Return on Assets (Trailing 12 Months) -4.98%
Revenue (Trailing 12 Months) 11.84B
Revenue per share (Trailing 12 Months) 158.73
Quarterly Revenue Growth (Year Over Year) -22.50%
Gross Profit (Trailing 12 Months) 1.28B
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NAV has seen large decreases in revenue and profit recently. Last year, NAV reported revenue of $12.95B compared to $13.96B in 2011. NAV's gross profit dropped significantly in 2012 to $1.28B from $2.70B in 2011. This year, NAV is on pace to see continued decreases in net revenue and profit.

Recent Trading Activity

NAV closed Friday at 34.27. This is slightly lower than its 52-week high of $38.81 and considerably higher than its 52-week low of $18.17. It is trading above both its 50-day moving average and 200-day moving average.

Earnings

NAV reported Q2 earnings of -$4.39 per share, $3.30 below analyst's estimate. This was the sixth quarterly report in a row in which NAV reported negative earnings.

Company Outlook

NAV lost significant revenue and market share when its engines failed to meet the EPA's emission standards. New EPA regulations coming into effect in 2014 and 2017 will present another challenge to the company as it looks to decrease costs and regain some of its lost market share.

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Looking at the chart above, it appears that the market is already anticipating a turnaround for NAV. While quarterly revenues have dropped significantly, the price of NAV has nearly doubled from its low last year.

I'm not convinced. NAV has done an admirable job of cutting costs, but it still have a lot of work to do. Until I see that NAV can reverse the trend of decreased revenue and earnings, I would steer clear of this stock, especially, since the price of the stock has increased during this time.

Stock #3

LKQ Corporation (NASDAQ:LKQ) provides replacement parts, components, and systems needed to repair vehicles throughout a number of different countries. LKQ's product line includes bumper covers and lights, remanufactured engines, transmissions, door assemblies, fenders, hoods, head and tail lights and assemblies, trunk lids, etc. LKQ was founded in 1998 and is headquartered in Chicago, Illinois.

Financial Performance

Profit Margin (Trailing 12 Months) 6.10%
Return on Assets (Trailing 12 Months) 7.74%
Return on Equity (Trailing 12 Months) 10.44%
Revenue (Trailing 12 Months) 4.53B
Revenue per share (Trailing 12 Months) 15.22
Quarterly Revenue Growth (Year Over Year) 24.40%
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For a decade, LKQ has seen steady increases in both revenues and profit.

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Revenue 327.97M 424.76M 547.39M 789.38M 1.13B 1.91B 2.05B 2.47B 3.27B 4.12B
Gross Profit 153.74M 197.62M 257.60M 357.55M 505.75M 843.83M 927.81M 1.09B 1.39B 1.72B
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LKQ is on pace to see another year of increased revenue and profit.

Current Valuation and Recent Trading Activity

LKQ has a current price to earnings value of 31.92x and a price to book value of 4.10x with earnings per share of $0.95. LKQ closed Friday at $29.24, down a bit from its 52-week high of $31.07 and up significantly from its 52-week low of $17.16. LKQ is trading above both its 50-day and 200-day moving averages.

Earnings

LKQ recently reported quarterly earnings of $0.26 per share. This continued LKQ's streak of increased earnings year over year. Annually, LKQ's earnings per share have increased from $0.11 per share in 2003 to $0.89 per share last year (increasing each year). LKQ is on pace to see increased earnings this year as well.

Company Outlook

LKQ is poised for continued growth. Through its recent acquisitions and joint ventures, LKQ has increased its market share and growth opportunities in Europe, Australia, and New Zealand.

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From the chart above, you can see that LKQ has seen steady increases in revenue, earnings, and stock price over the past decade. I believe that through LKQ's strong management decisions LKQ will continue to see similar increases in the coming years. I do believe that LKQ is overpriced at the moment and that it would be wise to wait for a better entry position before considering LKQ as a buy.

Stock #4

Tenneco Inc.(NYSE:TEN) designs, manufactures, and distributes emission control and ride control products and systems worldwide. Tenneco brands include Monroe, Walker, Gillet and CleviteElastomer. The company was founded in 1987 and is headquartered in Lake Forest, Illinois.

Financial Performance

Profit Margin (Trailing 12 Months) 3.67%
Return on Assets (Trailing 12 Months) 7.33%
Return on Equity (Trailing 12 Months) 113.90%
Revenue (Trailing 12 Months) 7.50B
Revenue per share (Trailing 12 Months) 124.68
Quarterly Revenue Growth (Year Over Year) 7.70%
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For Q2, TEN's 7.70% revenue increase was attributable to higher revenues in the company's Clean Air division and Ride Performance segment. The company also saw an increase in cash from $223M to $235M and an increase of $1M in cash flow from operating activities.

Current Valuation and Recent Trading Activity

TEN currently has a price to earnings value of 10.76x and a price to book value of 8.71x with earnings per share of $3.33. TEN closed Friday at $43.17, compared to its 52-week high of $50.88 an its 52-week low of $26.72. It is trading below its 50-day moving average, but slightly above its 200-day moving average.

Earnings

For Q2, TEN reported earnings per share of $1.10. This was ahead of estimate by $0.01 but a drop compared to the same period last year. The reason for the drop was due to increased taxes faced by TEN due to changes in the tax system. TEN still has a positive one year and five year growth rates.

Company Outlook

Tenneco has a lineup of products that I feel will lead to increased revenues for years to come, especially as the company continues to expand its market in areas such as Europe and South America. Some of these products include:

  • Tenneco Software-Based Signature Sound System
  • Thermoelectric Generator (NYSE:TEG) for Waste Heat Recovery
  • Electrical Valves for Low Pressure EGR
  • Electrical Valves for Cylinder Deactivation and Acoustic Tuning
  • Fabricated manifolds
  • RC1 Frequency Dependent Damping
  • Continuously Controlled Electronic Suspension System
  • DRiV

I feel that TEN will see increased revenues/earnings and at its current price I believe it is fairly valued. I think TEN deserves to be looked at as a buy for long term investors.

Conclusion

For the four companies reviewed above, the two that I consider buys are Federal Signal Corporation and Tenneco Inc. I also believe that LKQ Corporation is a company with a solid future, but I do think it is currently overvalued somewhat. I consider it more of a hold. Navistar International is the one company of the four that I would avoid for the time being completely. There are huge risks associated with this stock as its revenues continue to drop and I haven't seen enough evidence to suggest that NAV is capable of turning the company around. It is by far the riskiest of the four reviewed stocks IMO.

I plan on continuing this series of articles with Part III within the next week or two. Part III will focus on Chicago stocks in the retail industry.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.