TRW Automotive: Earnings Scorecard

| About: TRW Automotive (TRW)

TRW Automotive Holdings Corp. (TRW) reported its third quarter earnings for 2010 on November 3, 2010. The company has surpassed the Zacks Consensus Estimate by a significant margin of 69 cents per share. The market reacted favorably, with share prices rising following the earnings announcement.

Analysts were highly optimistic given the company’s impressive results and all of them covering the stock revised the estimates upward. Below we will cover the results of the recent earnings announcement, subsequent analyst estimate revisions and Zacks ratings for the short-term and the long-term outlook for the stock.

Third Quarter Outlines
TRW’s profits more than doubled from $76 million or 68 cents per share (excluding special items) in the third quarter of 2009, driven by higher revenue and lower cost structure of the company.

The company’s sales of $3.43 billion were boosted by higher global vehicle production volumes, offset partially by the negative impact from fluctuations in currency. Operating income (excluding restructuring and fixed asset impairment charges) rose $104 million to $269 million from $165 million a year ago on the back of an improvement in sales, positive impact of the restructuring and cost reduction measures, offset partially by a modest increase in raw material prices.

The company anticipates sales of $14.1 billion for full year 2010, including $3.4 billion for the fourth quarter of the year. The expectations were based on the assumptions of the industry production volumes of 11.8 million units in North America and 18.0 million units in Europe.

(Read our full coverage on this earnings report: TRW Flies Past Estimates)

Earnings Estimate Revisions – Overview
Estimates have improved over the last 30 days, reflecting analysts’ optimism about the stock, driven by the company’s impressive results. The share price movement was favorable as well, suggesting TRW as a prospective stock to be owned. Let us delve into the earnings estimate details.

Agreement of Estimate Revisions
The table below shows a strong agreement among the analysts regarding the outlook of TRW’s earnings. All the 7 analysts covering the stock have revised upward the estimate for 2010 with no downward revisions. For 2011, the trend remains the same. This commendable trend in estimate revisions predicts a consistent stream of earnings.

Magnitude of Estimate Revisions
The earnings estimate for 2010 has been raised by a significant margin of 77 cents from $4.95 to $5.72 over the last 30 days. Over the last 7 days, the estimate has been revised upward by 16 cents from $5.56. For 2011, the estimate has been raised by 76 cents from $5.25 to $6.01 over the last 30 days, while over the last 7 days, it is up by 12 cents from $5.89. Thus, the analysts are confident about the company’s earnings as they continue to value the stock at a stable premium.

TRW in Outperform Lane
TRW Automotive has an innovative product portfolio that is capable of generating top- and bottom-line growth despite the soft automotive climate. This differentiates the company from many of its peers, including Autoliv Inc. (ALV), Delphi Automotive and Robert Bosch GmbH. Further, it plans to expand in the emerging markets of Asia and South America to capitalize on the high growth volumes in these regions.

TRW has managed to successfully mitigate the impact of the industry downturn through cost-cutting measures, including headcount reductions and plant closures. Overall, cost cutting has generated savings of nearly $400 million annually.

This along with higher profit has led to an improvement in the company’s cash flow in the recent quarters. In the first nine months of 2010, the company had net cash flow of $690 million from operating activities in contrast to an outflow of $57 million in the same period of prior year. Free cash flow was $522 million compared with an outflow of $178 million in the same period last year.

As a result, TRW has Zacks #1 Rank on the stock, which translates to a short-term (1–3 months) recommendation of Strong Buy. Given the impressive earnings and the company’s market position, we also reiterate our Outperform recommendation on the stock for the long-term (more than 6 months).