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The auto stocks are going ballistic today - I'll take full credit as the reason. Ahem.

I mentioned TRW Automotive (NYSE:TRW) this morning... it had spectacular earnings. BorgWarner (NYSE:BWA) already reported an excellent quarter and Magna International (NYSE:MGA) reports tonight after the bell. Ford (NYSE:F) is blowing through shorts, adding another nearly 5% today.

These companies have right sized to such a degree they are minting money at sub $12M in annual US sales (and not so great European demand). If we see the domestic auto market back to $13M - $14M (peak during "using your house to buy pools, granite countertops, vacations, and cars" era was $16M+) the EPS potential will be profound. I am not counting on that... $12M - $13M in 2011 would be fine, and probably $13.5M - $14.5M is what the US market can support without "easy money" policies, in a normally functioning economy.

The big caveat in the near term is commodity costs, as these companies are heavy material users. So that is going to be the main risk go forward, as sales volumes should not go down much from here. (And yes, I am still bullish on GM (NYSE:GM) - in fact the government granted them $45B - $50B of tax free gains as part of the bailout - how is that for corporate socialism? Almost as nice the banking TARP.)

This supplier group reminds me of fertilizer stocks circa 2007 -- that was my favorite group back then because analysts had no idea how to model the earnings, and each quarter you'd get huge upside surprises. So many labor and benefit costs have been taken out of this group in the past 3 years, people simply do not understand. While awful for the worker class, it is great for the investor class -- a testament to the greater US economy as a whole and why the bottom 2/3rds are flailing. (But don't worry, prosperity will "trickle down" to these people as long as the corporations print record profits -- that's what the textbooks say, granted we've been waiting 2 decades but just be patient.)

The long term "risk" for this group is the suppliers that are more unionized are going to have to give something back to labor once they see the huge profits the companies are accumulating. But that should still be a while down the road.

I don't know why TRW sold off yesterday on these superlative results... but I was glad to get in this AM. There *is* a gap in the chart created by yesterday's jump; in a normal market I'd point it out and say be wary of the fill. But right now I see hundreds of charts with unfilled gaps and stocks that are in parabolic runs above those gaps.

(Click to enlarge)

In terms of subsector, think of TRW Auto as focusing on safety. TRW Automotive products include integrated vehicle control and driver assist systems, braking systems, steering systems, suspension systems, occupant safety systems (seat belts and airbags), electronics, engine components, fastening systems and aftermarket replacement parts and services.

Analysts had them in for a $0.78 EPS quarter on $3.15B in sales. They did $1.47 (on $3.4B in sales). Their full year 2010 $4.91 estimate immediately goes up about 70 cents to $5.60 and the fourth quarter estimate of $0.85 looks like a joke.

If they can control commodity costs this is looking like a $6.00 year -- frankly I could be conservative in that figure; $6.25 might be viable. Hence the stock trades at less than 10 forward... again a very cyclical business so PE ratios somewhat useless.

  • TRW Automotive Holdings Corp said on Wednesday that quarterly profit more than tripled as its customers' increased vehicle production supported sales.
  • TRW, which makes auto safety equipment such as airbags and electronic stability controls systems, raised its full-year sales forecast and said the overall auto industry recovery would support a strong year for company.
  • Net income rose to $199 million, or $1.54 per share, in the third quarter, from $56 million, or 50 cents per share, a year earlier.
  • Excluding one-time items, TRW reported earnings of $1.47 per share. On that basis, analysts on average expected 78 cents, according to Thomson Reuters I/B/E/S.
  • Revenue rose 10 percent to $3.4 billion, while analysts expected $3.15 billion.
  • TRW said increased vehicle production and restructuring in recent years to reduce costs supported results. Negative currency movements and a modest increase in raw materials prices pressured results.
  • The beat was solid even after accounting for a tax rate that was lower than expected and some potentially nonrecurring benefits, JPMorgan analyst Himanshu Patel said in a note.
Guidance
  • TRW raised its full-year sales forecast to $14.1 billion from a range of $13.2 billion to $13.6 billion disclosed with its second-quarter earnings release. The 2010 forecast includes expectations for fourth-quarter sales of about $3.4 billion.
  • TRW is assuming a 11.8M run rate for 2010 in the US (18M units in Europe).

See conference call transcript here.

Disclosure: Author long TRW in fund; No personal position.

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Source: Taking a Front Seat to Profits in Auto Sector: Play on TRW Automotive

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