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Automodular (AM.TO): A Micro Cap Way to Play the North American Auto Industry Recovery

May 19, 2011 3:17 PM ETAMZKF, F, GM, LEA, JCI1 Comment
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On May 17th A.T. Kearney published its 15th annual automotive study on U.S. auto sales volumes. (Link to A.T. Kearney study summary: http://www.atkearney.com/index.php/News-media/at-kearneys-15th-annual-automotive-study-indicates-us-auto-sales-volumes-will-trend-back-to-historical-levels-by-2013.html). In the study A.T. Kearney forecasts that 13.2 million new autos will be sold in the U.S. this year rising to 16 million units by 2013.
Much has been written about the collapse of the U.S. auto industry during the financial crisis of 2008. As an investor if you believe in the revitalization of the North American auto industry there are multiple ways to participate including investing in the OEMs like Ford (F) and General Motors (GM), investing in auto suppliers like Lear (F) or Johnson Controls (JCI), etc.
For an investor with a mandate that allows investing in small and micro cap companies and the intestinal fortitude to withstand the volatility of the micro cap space there is an auto supplier opportunity that while risky has the potential to offer a return compensatory with the risk.
Company Overview
Automodular (AM.TO) is an auto supplier based in Canada that trades on the Toronto Stock Exchange. Automodular provides the sequencing and sub-assembly of modules that are installed in vehicles assembled by Ford Motor Company (F) in its Oakville, Ontario assembly plant. The company’s current contracts are for the Ford Edge, the Lincoln MKX, the Ford Flex, and the Lincoln MKT models.
The company delivers sub-assembled modules (such as an instrument panel or a powerpack) to the assembly plant in the final installation sequence at precisely the time they are to be installed. Automodular receives orders every thirty seconds and ships completed assemblies typically within several hours of receiving the order.  Automodular’s plant is located near the final assembly plant to facilitate the real-time delivery of the modules. 
Prior to the downturn the company had more expansive operations. Over the course of the past few years Automodular exited its U.S. operations in 2010, and had a contract terminated by General Motors. This contact termination resulted in $7.5mm CAD of costs to Automodular. Also in 2010 the company signed a multi-year agreement with Ford that runs through July 2012. The company also paid down its term credit facility and executed a $5mm CAD share buyback through a Dutch Auction.
Sales in 2010 increased 17% over 2009 due to the increased activity with Ford.   2010 EBITDA of $17.2mm CAD grew 58% versus 2009. The closure of the U.S. operations and the termination of the GM contract resulted in one-time charges, which have now worked their way through the financials.
As of market close on May 18 the stock price was $1.32 CAD per share representing a market capitalization of $29.9mm CAD. As of December 31, 2010 the company had cash and equivalents of $10.3mm CAD and $0.4mm CAD of debt. The enterprise value is approximately $17mm CAD and the company has shareholders’ equity of $33.2mm CAD.
For additional detail see the 2010 annual report (link: http://www.automodular.com/pdfs/Automodular2010_AnnualReport.pdf).
Current Valuation
Based on its trading multiples Automodular appears very cheap and would come up on a value screen that includes micro cap companies. The company trades at 0.2x sales, 0.7x 2010 EBITDA, 2.2x 2010 earnings, and 0.6x book value.
Investment Thesis
The investment thesis for Automodular is quite simple. As long as the economy continues to improve and demand for the autos increases Automodular will continue to benefit from strong demand and production levels at their Oakville facility. This will lead to strong cash flow generation, which will result in continued special dividends and/or share buybacks. In the past year Management has returned capital to shareholders in the form of two special dividends totally $0.45 per share and repurchased $5mm CAD of share, which at the time represented approximately 20% of the shares outstanding. At $1.32 per share the dividend equates to a 34% dividend yield (and it only represents 2 quarters). While both dividends were special dividends and there is no certainty that they will continue on a quarterly basis management’s commitment to returning capital to shareholders is very clear.
First Quarter 2011 Results
On May 12th the company announced its results for the first quarter of 2011. The company earned
$3.5 million or $0.18 per share for the quarter versus a net loss of $(0.2) million or $(0.01) per share in the first quarter of 2010.
The results for Q1 2011 include a $1.0 million (pre-tax) charge related to obligations on an idled facility. The Q1 2010 results included a $5.0 million (pre-tax) charge on account of exit costs and a plant and equipment impairment charge the majority of which was related to GM's termination of Automodular's remaining Oshawa-area contracts
The earnings release also announced the special dividend of $0.25 CAD per share payable June 20 to shareholders of record June 6. The stock will trade ex dividend on June 2.
The stock traded up to $1.39 from $0.92 post the earnings release. (Link to Q1 2011 results press release: http://finance.yahoo.com/news/Automodular-Corporation-First-ccn-2708138886.html?x=0&.v=1).
Investment Risks
·         The customary risks involved in investing in a micro cap company exist such as a lack of liquidity and the associated volatility. 
·         Exposure to the auto market, which could be negatively impacted if the economy stopped growing.
·         Automodular’s business is now based on supplying only one OEM in Ford. Therefore if Ford has issues, decides to discontinue the models that Automodular supplies, or alters their manufacturing footprint in a way that impacts Oakville, it could materially impact Automodular.

Disclosure: I am long OTC:AMZKF.

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