I wouldn't buy
. But that doesn't mean you should throw the baby out with the bath water -- which is exactly what the Street has done with Ford's offspring,
, the former captive auto-parts supplier division that Ford spun out tax-free to its shareholders in June 2000.
Like other auto-parts suppliers, Visteon has done relatively well this year, up 23% (in line with the average company in the group). Almost two-thirds of that move has taken place in the past month (happily, I recommended auto-parts suppliers in an
Oct. 26 column). Despite its recent rise, Visteon is still treated like a red-haired stepchild on Wall Street. At $14, the stock is down 35% from its 52-week high, selling at one of the lowest valuations in the entire auto-parts supplier group.
Don't get me wrong; Visteon does have some problems, not the least of which is its reliance on Ford. Although Visteon is one of the world's largest parts suppliers, Ford still represents 80% of Visteon's $19 billion in sales. As a result, Visteon's shares tend to be fairly volatile, rising and falling on news regarding Ford's production schedule, which of late has not been very encouraging. Ford's current plan for North America calls for a 7% year-over-year production decline in the fourth quarter and a 9% decline in the first quarter of 2002.
The good news is that Visteon is gradually weaning itself from Ford. Last year at this time, Ford accounted for 83% of sales. In the third quarter alone, Visteon won about $400 million in new business (net of lost sales), bringing its year-to-date total to $1.6 billion, 75% of which is non-Ford.
Some of these new contracts include instrument panels, audio systems and cockpits for Mercedes large commercial trucks in Europe, rear DVD systems for
( DCX), and cockpits and front-end modules (bumper, grill and headlights) for
minivans and light trucks that will be built at Nissan's new plant in Mississippi.
Visteon's most exciting new products include highly value-added voice technology and vehicle entertainment systems. The parts supplier already has an agreement with
to provide its midsized sport-utility vehicles with rear-seat DVD entertainment systems (these systems are a great way to keep kids occupied during long trips).
The company is the market leader in voice technology, which enables the driver to control air conditioning, climate-control systems and radio by voice commands, and to place and receive voice-activated phone calls. These systems are already in the Jaguar S-type cars and the Nissan Infiniti Q-45.
Visteon also has a lot going on below the revenue line, where the newly independent company is attacking its cost structure. It has some of the lowest margins in the auto-parts supplier universe -- and that's exactly why there is opportunity in this stock. There's huge upside potential for this company to improve its bottom line, just by moving its operating margin from the 0.3% it posted for the first nine months of this year up to the industry average margin of 4.5%. So far in 2001, Visteon has reduced its salaried headcount by 2,000, or 10.6%. The company has spread $130 million in restructuring charges over the second, third and fourth quarters to cover these workforce reductions and the restructuring of its glass business.
Perhaps most important, Visteon is in surprisingly strong financial shape, particularly when you compare it with its auto-parts supplier peer group. Visteon's debt-to-total-capital ratio is just 17%, much lower than the auto-parts supplier average of 54.7%. The company's ratio of debt to EBITDA (earnings before interest, taxes, depreciation and amortization) is just 1.4, compared with 5.8 for the average supplier. At the end of the second quarter, Visteon had $1.2 billion in cash on the balance sheet, equaling almost 70% of its
Finally, Visteon is incredibly cheap. It is selling at an enterprise value (equity market value plus net debt) to EBITDA ratio of just 3; that's at the bottom of the auto-parts supplier pack. The average supplier trades at a ratio of 6.3. Visteon is also cheap on a
price-to-book value basis, where it trades at just 0.6 times book, compared with 1.3 times for the average supplier.
If you're at all interested in the auto stocks because they look cheap, I'd go with a stock like Visteon instead. Sure, it has earnings risk associated with Ford's production schedule, but with the stock selling at such a low valuation, I think there's very limited downside. And if the restructuring moves take hold and margins move up, this stock could be a double.
Odette Galli writes daily for TheStreet.com. Before coming to TSC, Galli was a writer at SmartMoney Magazine. Prior to that, she worked as a senior manager at Ark Asset Management where she managed $3 billion in institutional assets. In addition, Galli was a senior vice president at J & W Seligman. She has also served as a research analyst for Morgan Stanley & Co.
In keeping with TSC's editorial policy, Galli doesn't own or short individual stocks, although she owns stock in TheStreet.com. She also doesn't invest in hedge funds or other private investment partnerships. She invites you to send your feedback to