TRW's Share Buyback Is A Great Idea

| About: TRW Automotive (TRW)

TRW Automotive (NYSE:TRW) announced a $1 billion share repurchase program that sent shares soaring. We identified shares as substantially undervalued when the supplier reported second quarter earnings in early August. Also, in June, Seeking Alpha selected this article on TRW as an editor's pick, highlighting the firm's significant undervaluation. The firm previously announced it would return cash to shareholders, but we now have clarity to what extent and how. At current levels, a repurchase would shrink the share count by over 16%, which would be substantially accretive to shareholders, in our view.

Though the announcement propelled shares to the low end of our fair value range, we still like the company's valuation and position to benefit from a cyclical upturn. If the firm can remain disciplined in its buyback program, rather than indiscriminately buying with no regard for price, we think the repurchases will be very lucrative for shareholders. Given the uncertainty with regards to dividend taxes still in play, we're very supportive of buybacks if the price is right. In TRW's case, the price is right.

However, given the volatility in the automotive sector created by European industry weakness, we wouldn't be surprised to see shares dip back below the low end of our fair value range, making them an even more attractive investment opportunity, in our view. US automotive production should remain strong into the fourth quarter of 2012, and we anticipate auto sales will increase in 2013 and 2014. Though the new normal for the SAAR is slightly lower than previous cycles, we don't think it would be outrageous to expect a SAAR around 15 million units during the next few years, especially if the economy accelerates.

Within the auto universe, Ford (NYSE:F) continues to possess the greatest total return potential, in our view. As a result, we hold shares of the automaker in the portfolio of our Best Ideas Newsletter (please see links on our left sidebar for more information).

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.