Cooper-Standard Holdings (NYSE:CPS) has a significant market share in three categories within the auto parts industry: Sealing Systems, Fuel & Brake Delivery Systems, and Fluid Transfer Systems.
The company has been facing tough headwinds, which started with the slowdown of passenger and light vehicle production back in 2018. After reaching a high of approximately $143 per share that year, the stock price plummeted to a low of $9 as the pandemic gripped global economies. Shares have since rebounded to $15 apiece.
The loss in value can be explained by the 8 consecutive quarters of double-digit to high-single digit sales declines. A decline in sales, coupled with a high fixed cost structure (PPE to sales is approximately 32%), caused gross margins to decrease by approximately 40%, from 19% in 2016 to 11.6% by 2019. The steep sell-off in CPS’s market value can also be attributable to its highly levered balance sheet, with long-term debt and pension liabilities of $934 million against equity of $875 million at the end of 2019.
Before the pandemic hit the economy, the company was already implementing a restructuring strategy to better align costs and efficiencies by selling non-core assets, closing down manufacturing plants, and by divesting its Anti-Vibration Systems segment. Management’s goal is to achieve returns on invested capital above 10%.
We believe CPS has reached the point of maximum pessimism. The market is rebounding, and we are seeing positive signs with auto parts suppliers. For example, Strattec Security Corporation (STRT), maker of door locks, keys, handles, and related products, has recently reported strong Q1 sales (ended in September) with revenues up 5.2%. CPS and STRT share the same customer base, with Ford (F), GM (GM), and Fiat-Chrysler (FCAU) accounting for 55% of sales for CPS and 62% for STRT. STRT’s management
