We Think TRW Auto Is Extremely Cheap

Oct.13.11 | About: TRW Automotive (TRW)

We think TRW Automotive (NYSE:TRW) represents one of the most compelling auto parts valuation plays on the market. We think it fits perfectly within Valuentum's stock-picking methodology (the Valuentum Buying Index), which focuses on undervalued stocks that generate significant economic value for shareholders, while demonstrating identifiable avenues of growth. We outline the valuation section of our report on TRW Automotive below, and for interested investors, we make available our full report on TRW Automotive and hundreds of other companies on our website.

What is TRW Automotive Worth?

There are many schools of thought on valuation, but we feel a comprehensive discounted cash-flow process coupled with a rigorous relative value assessment versus peers is the best way to identify stocks poised for material capital appreciation. We prefer stocks that are trading at a discount to our fair value (based on our discounted cash-flow process) and are trading at a discount versus peers based on a relative value basis.

What really gets us excited about TRW is its valuation as determined by our DCF process, which is why we are considering the firm in the portfolio of our Best Ideas Newsletter. Importantly, however, we look for stocks with identifiable growth prospects and employ a technical and momentum assessment in order to avoid 1) value traps and 2) from buying great stocks but at an inopportune time. We don't just buy stocks because they're cheap -- as all investors know that stocks can often become cheap for good reasons.

In TRW's case, we're projecting mid-single-digit revenue expansion over the next five years with relatively flat earnings growth. We feel these expectations are more than realistic, and we're using a relatively high rate to discount future free cash flows. Plus, even after applying a fairly sizeable margin of safety around our fair value estimate, we can only conclude that the market is unfairly beating down this stock. We reveal our valuation assumptions below. All things considered, TRW Automotive is worth about $60 per share, significantly higher than where it is currently trading.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.