It Is a Dirty Job, but Somebody....
What could be more exciting than auto parts, ok we will get to coal mining later.
When I wrote a post called “Just Plain Ugly”, I was reminded that I had not looked at Goodyear - GT - $11 - in a long time.
So I got up this morning and dove in. Let’s talk about the steps I followed:
These days I generally start with a presentation. GT had one from November 2023 which discussed their strategic review of the company. One hour latter, I had a pretty good idea where GT was going.
Next I went to the summary page on Guru Focus (Seeking Alpha could also be used). A quick look showed some balance sheet issues, but the EV/sales ratio was a fairly low .60x. For a solid set on brand names that is pretty impressive. I followed Cooper Tire (all replacement tires) for years (Which GT acquired in 2021 for $3 billion), and they often traded above 1x sales.
While at Guru Focus, I also looked at the large GT stock owners. I was troubled to find no real value investors own the stock. Goldman Sachs does own 3%, but I am not sure if that is a positive, or a negative.
The GT Wikipdeia page gave me a pretty good history. It reminded me that in 1986 Sir James Goldsmith, and my good friends at Hanson, greenmailed GT.
Reading news stories, I eventually got to the fact the activist hedge fund Elliot Management had bought 10% of GT in May 2023 and asked for 5 board seats and a strategic review.
The Elliot letter to GT can be found online and makes a fairly strong case that GT’s retail assets might be worth far more than the current share price.
GT did give Elliot 3 board seats, but the strategic review only recommended selling chemicals, off road tires, and Dunlap. I remain confused if Elliot still owns the stock. I do not find the stock on Elliot’s Whale.com page, but I have also not seen a news story that indicates a sale.
I finally found a debt structure slide at the back of the first quarter earnings announcement, and concluded the maturity schedule was ok. Only about 20% due in the next few years.
It was time to form a conclusion. The Elliot presentation made some good points about the health of the brand, and the need to cut SG&A expenses. I think a reasonable person might conclude this could be a $20 stock, but I remain skeptical that current management really wants to change. Right now GT might be a top 40 idea, but not top 20 idea.
My work is far from done. Before I can really judge GT, I must consider my other possibilities in auto parts.
You could define the industry narrowly as tires, and just look at Michelin, Bridgestone, and Continental, but I think you need to consider everybody in auto part. Just the presence of 3 nasty $20+ billion competitors in tires, makes GT less interesting. Or perhaps you could argue GT is the perfect acquisition target. Michelin is near its high, but Continental - CTTAY - is at its 10 year low, could be interesting if Europe is ever a safe place again.
I started with the auto part companies I do not know, and finished with those I had looked at before. They are presented below in the order of attractiveness:
BorgWarner - BWA - $31 - BWA has interesting growth opportunities in EV’s, but a solid level of profitability in ICE powertrains. The balance sheet is pristine, allowing active buybacks the last few quarters. There is more China exposure (maybe 30%) than I prefer, but they have been there 10+years. EV/sales is only .7x for a company with much better technology and market share than GT. Wall Street is neutral, 10 buys and 9 sells. Smart guys at Victory Capital own 6% and even Bill Nygren takes 3%. Nygren is usually “too growth oriented” to bother with auto parts. BWA is very close to a top 20 idea, and much better than GT. If then economy had a clearer picture in 2025, this would be a top idea. A 2025 EPS estimate of $4.60 might be too aggressive.
Visteon - VC - $105 - These guys have gone through a bankruptcy, so now the balance sheet is clean. EV/sales of .73x for solid electronics products for OEMs. Victory owns a chunk. Does not have the EV exposure of BWA.
LCI Industries - LCII - $102 - This is not auto parts, but RV parts. Very well run company, .90x EV/sales, 4% yield. Only 2 buys and 6 sells. This idea needs more work, but I am intrigued. PATK is the same thing, but near its high.
Motorcar Parts of America - MPAA - $6 and Strattec Security (locks, spinoff from Briggs & Stratton) - STRT - $25 deserve more work, but have market caps near $100 million, so that is a project for another day. STRT is only .25 EV/sales. MPAA is .45x EV/sales, and is owned by some interesting folks.
Dorman -DORM - is a slow and steady maker of replacement parts, but 16x earnings is too expensive
Gentex - GNTX - is the Tootsie Roll of auto parts. They stick to one product, mirrors, with no debt allowed. Too expensive.
Autoliv - ALV - Swedish maker of seat belts, too expensive, but steady
American Axle -AXL - too leveraged
Dana - DAN - too leveraged
MGA - Magna International - too many Canadian issues