TRW Automotive Holdings Corp.
/ (TRW-NYSE)/ Equity Research / TRW | Page 1
Current Recommendation / NEUTRAL
Prior Recommendation / Outperform
Date of Last Change / 10/14/2014
Current Price (02/16/15) / $103.60
Target Price / $109.00
SUMMARY
TRW posted a 25.5% increase in fourth-quarter earnings to $2.31 per share,which exceeded the Zacks Consensus Estimate by $0.41. Revenues dropped 3.3% to $4.35 billion, but surpassed the Zacks Consensus Estimate of $4.26 billion. Revenues benefited from increased demand for the company's active and passive safety technologies,but were offset bythe exit of some businesses and the adverse impact of currency translation. For 2015, TRW anticipates revenues in the range of $16.6–$16.9 billion. The company expects to record $4.2 billion in revenues in the first quarter of 2015.However, we are concerned about the impending takeover by ZF Friedrichshafen. Thus, we are maintaining a Neutral recommendation on TRW./ Equity Research / TRW | Page 1
SUMMARY DATA
52-Week High / $105.4752-Week Low / $76.34
One-Year Return (%) / 29.81
Beta / 1.84
Average Daily Volume (sh) / 1,099,462
Shares Outstanding (mil) / 111
Market Capitalization ($mil) / $11,500
Short Interest Ratio (days) / 1.50
Institutional Ownership (%) / 81
Insider Ownership (%) / 2
Annual Cash Dividend / $0.00
Dividend Yield (%) / 0.00
5-Yr. Historical Growth Rates
Sales (%) / 6.0
Earnings Per Share (%) / 6.4
Dividend (%) / N/A
P/E using TTM EPS / 12.7
P/E using 2015 Estimate / 12.4
P/E using 2016 Estimate / 11.7
Zacks Rank*: Short Term
1–3 months outlook / 3 - Hold
* Definition / Disclosure on last page
Risk Level * / Low,
Type of Stock / Large-Blend
Industry / Auto/Truck-Orig
Zacks Industry Rank * / 72 out of 267
RECENT NEWS
TRW Beats on Q4 Earnings, Revenues Fall– Feb 13, 2015
TRW posted a 25.5% increase in its fourth-quarter 2014 earnings to $2.31 per share from $1.84 (all excluding special items) a year ago. Also, earnings per share exceeded the Zacks Consensus Estimate by $0.41. Net earnings (excluding special items) went up 20.7% to $268 million from $222 million in the fourth quarter of 2013.Including special items, TRW reported net loss of $360 million or $3.22 per share in the fourth quarter of 2014, compared with net earnings of $363 million or $3.00 per share a year ago.
Revenues in the quarter dropped 3.3% to $4.35 billion but surpassed the Zacks Consensus Estimate of $4.26 billion. Revenues benefited from increasing demand for the company's active and passive safety technologies. However, this increase was offset by the negative impact of the exit of some businesses in the North American brake component and assembly operations, and the adverse impact of currency translation.
Adjusted operating income rose 8.3% to $364 million (8.4% of sales) from $336 million (7.5% of sales) in the year-ago quarter. Including all special items, the company recorded operating loss of $481 million, compared with operating income of $300 million a year ago.Earnings before interest, taxes, depreciation and amortization and special items (adjusted EBITDA) came in at $472 million in the quarter versus $447 million in the fourth quarter of 2013.
2014 Performance
TRW’searnings increased 18.7% year over year to $8.18 per share for full-year 2014 from $6.89 recorded in 2013. Earnings also surpassed the Zacks Consensus Estimate of $7.74.
Revenues for full-year 2014 increased 0.6% to $17.54 billion from $17.44 billion in 2013, marginally surpassing the Zacks Consensus Estimate of $17.52 billion. The year-over-year increase in revenues was driven by rising demand for the company’s innovative technologies and higher vehicle production volumes, partially offset by the exit of certain businesses in the first quarter of 2014.
Acquisition byZF Friedrichshafen
In Sep 2014, TRW announced that it will be acquired by ZF Friedrichshafen AG. The latter will invest $13.5 billion to buy all outstanding shares of TRW at $105.60 per share. The transaction is expected to end by the first half of 2015, subject to receipt of stockholders’ and regulatory approvals, and other customary closing conditions.
Capital Deployment
In 2014, TRW purchased around 4.5 million shares for $400 million. The company also converted $116 million of exchangeable notes to 3.9 million shares in 2014.
Financial Details
TRW had cash and cash equivalents of $1.03 billion as of Dec 31, 2014, compared with $1.73 billion as of Dec 31, 2013. Total debt decreased to $1.58 billion as of Dec 31, 2014 from $2.11 billion as of Dec 31, 2013.
In 2014, net cash flow from operating activities decreased to $954 million from $1.1 billion in the year-ago period. Capital expenditure decreased to $694 million from $735 million in the comparable year-ago period. Consequently, free cash flow was $435 million, compared with $391 million in 2013.
Outlook
For full-year 2015, TRW anticipates industry production of 17.4 million units in North America, 2% higher than 2014 and 20 million units in Europe, flat with that recorded in 2014. Vehicle production in China and rest of world regions is expected to increase.
Revenues for 2015 are expected to be in the range of $16.6–$16.9 billion. The company expects to record $4.2 billion in revenues in the first quarter of 2015.However, revenues will be adversely affected by loss of sales due to divested businesses, sale of TRW's engine valve business, and the fluctuation in foreign currency exchange rates.
VALUATION
Currently, shares of TRW Automotive are trading at 12.4x our 2015 EPS estimate of $8.33. The company’s current trailing 12-month earnings multiple is 12.7, compared with the 17.4x average for the peer group and 19.3x for the S&P 500. Over the last five years, shares of TRW Automotive have traded in a range of 4.4x to 26.3x trailing 12-month earnings. The stock is also trading at a discount to the peer group, based on forward earnings estimates. The current P/E is at a 21.5% discount to the peer group for 2015. Our long-term Neutral recommendation on the stock indicates that it should perform in line with the broader market. Our target price of $109.00 is 13.1x our 2015 EPS estimate.
Key Indicators
Earnings Surprise and Estimate Revision History
NOTE – THIS IS A NEWS-ONLY UPDATE; THE REST OF THIS REPORT HAS NOT BEEN UPDATED YET.
OVERVIEW
TRW Automotive Holdings Corp. (TRW) is a leading manufacturer of advanced technology products and services for automotive markets. Headquartered in Michigan, the company operates in more than 185 locations, covering every vehicle-producing region worldwide. These operations primarily involve the design, manufacture and sale of active and passive safety-related products.
TRW Automotive isamong the world’slargest suppliers of automotive systems, modules and components to global automotive manufacturers. The company is a leading supplier to original equipment manufacturers (OEMs), who generated 83% of its revenues in 2013.
TRWAutomotivehas four business divisions: Chassis Systems, Occupant Safety Systems, Automotive Components and Electronics.
The Chassis Systems division (64.5% of segment sales in the first nine months of 2014) manufactures automotive and commercial steering systems, foundation brake components and systems, seat belt systems, engine valves and valve train systems.
The Occupant Safety Systems division (19.4%) makes air bags, seat belts, crash sensors as well as other safety and security electronics. The company is also among the global leaders in brake control systems, airbag systems, safety electronics, body control systems, steering wheels, engineered fasteners in foundation brakes and seat belts.
The Automotive Components division (10.9%) offers valves, plastic components and body controls. Globally, the company is the second largest supplier of engine valves.
The Electronics division (5.2%) focuses on the design, manufacture and sales of electronic components and systems in areas of safety, radio frequency, chassis, driver assistance and powertrain.
REASONS TO BUY
TRW Automotive is globally recognized as one of the largest and most diversified suppliers of automotive systems, modules and components to OEMs and the related aftermarket. In addition, the company is constantly striving to improve its vast product portfolio, which is capable of generating top- and bottom-line growth even amid a soft automotive environment. This differentiates the company from many of its peers. Moreover, TRW Automotive has a strong financial position, which facilitates capital deployment. On Aug 29, 2014, the company completed the $400 million accelerated share repurchase (“ASR”) program which was initiated in Feb 2014. It purchased around 4.5 million shares for $400 million. TRW Automotive has $1.1 billion remaining under its repurchase authorization. This is restricted pursuant to the ZF merger agreement. During 2013, TRW Automotive repurchased 7.5 million shares of its common stock for $520 million and converted $26 million of exchangeable notes into shares. The company also used $309 million to pay off senior notes with a face value of $296 million. Since 2012, TRW Automotive has repurchased shares worth $1.2 billion.
In Jan 2015, TRW Automotive announced that it is expanding the Electronics business in order to satisfy the rising demand for automated vehicles. The company is doubling the automated vehicle engineering team so as to fulfill the rising product development demand from Europe, North America and Japan. Over the last three years, the Electronics business of the company has hired many workers who will support the development of advanced radar and camera technologies.
In Sep 2014, TRW Automotive signed an agreement to divest its engine valve business to Federal-Mogul Holdings Corporation. The divestiture, expected to be completed in the first quarter of 2015, will generate $385 million in proceeds, which will be used for general corporate purposes. Additionally, it will allow the company to focus on its active and passive safety technology products.
TRW Automotive continues to invest in innovative technologies that enable it to win contracts. The company launched many innovative products in the third quarter that have helped it maintain its leadership in safety solutions. In Dec 2014, the company introduced a new version of small pyrotechnic inflator SPI2 EVO with weight and size advantages, which will feature in its new lightweight roof rail airbag for micro- through mid-sized vehicles in Europe and China. In Oct 2014, the company launched the third-generation electrically powered steering column drive technology. In Europe, the technology was launched in vehicles including the VW Polo, Up and e-Up, Audi S1, Skoda Rapide, Space Back, Fabia and Citigo as well as the FIAT 500L. In China, it features in the GAC FIAT Viaggio. The company displayed a new, lightweight radius rod for trucks at the IAA Commercial Vehicles show in Hanover in Sep 2014, which should be ready for production by the end of 2016. In the same month, TRW Automotive also announced the development of a new radar technology for 360 degree sensing around a vehicle, which will be ready for production by 2015. The technology can enable various driver-assist features such aslane-change assist, blind-spot detection, cross-traffic alert, side-impact sensing, parking aids and collision warning. The sensors can also be integrated with the vehicle braking and electric power steering systems to provide limited emergency braking, traffic jam assist and automatic park assist. In Jun 2014, it launched a new seat belt retractor – the Floating Spool 1 (“FS1”), which offers reduced weight and size. In Apr 2014, it started producing roof airbags for the Citroen C4 Cactus. In Mar 2014, it launched the second generation Active Control Retractor seat belt system (“ACR2”) in North America in the Cadillac CTS.
TRW Automotive is signing long-term supply deals to boost sales. In Sep 2014, the company signed a seven year agreement with Daimler Trucks North America (DTNA) to be the standard steering system supplier across the DTNA lineup. Per the agreement, TRW Automotive will supply steering gears, pitman arms, linkages, columns and pumps to DTNA’s Freightliner, Western Star, Thomas Built Bus, and Freightliner Custom Chassis brands. In Oct 2013, TRW Automotive signed a deal to supply its Electrically Powered Hydraulic Steering (EPHS) technology to Ferrari's LaFerrari. This is the first Ferrari to feature hybrid propulsion. EPHS helps in enhancing fuel efficiency and reduces carbon dioxide emissions.
REASONS TO SELL
In Sep 2014, TRW Automotivesigned an agreement tobe acquired by ZF Friedrichshafen AG for $13.5 billion. Moody's Investors Service placed the Ba1 Corporate Family and Ba1-PD Probability of Default ratings of TRW Automotiveunder review for downward revision.
For the full year 2014, revenues are expected to be $17.4 billion, down from the previous guidance of $17.5–$17.7 billion. For the fourth quarter, the company expects revenues to be $4.2 billion, down from the year-ago results. The decline in sales is expected due to the negative impact of businesses exited and currency headwinds. TRW Automotive faces a challenging situation in Brazil owing to the country’s unfavorable economic conditions which adversely affects vehicle demand and production volume.
Slow recovery in the U.S., Europe and many other economies in the past few years led to a cautious outlook on the global economy. Although the U.S. economy is recovering, the sustainability of consumer demand is under question, posing threats to global vehicle sales and production.
TRW Automotive suffers from high customer concentration. Ford, General Motors, Chrysler and Volkswagen accounted for nearly 63.2% of the company’s sales in 2013. The loss of any one of these customers or major production cutbacks could significantly impact operations.
TRW Automotivefaces a challenging pricing environment as OEMs demand concessions. Furthermore, commodity pricing volatility continues to affect business. The company’s operating results are likely to be hurt by unstable commodity costs and increased price concession.
DISCLOSURES & DEFINITIONS
The analysts contributing to this report do not hold any shares of TRW. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts’ personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1121companies covered: Outperform- 15.6%, Neutral- 76.5%, Underperform – 7.2%. Data is as of midnight on the business day immediately prior to this publication.
Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company’s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock’s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.
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