(5 Risky Auto Supplier Stocks story updated to reflect IBISWorld's risk and market analysis of various auto supplier sectors)
NEW YORK ( TheStreet) -- U.S. auto suppliers have had their share of pain and bankruptcies to contend with in recent years amid the steep downturn in U.S. automotive production and bankruptcies of large customers such as GM and Chrysler.

While auto suppliers as a group may not be completely out the woods yet, things certainly do like they're picking up, with Visteon ( VSTNQ), exiting bankruptcy protection at the beginning of October and September auto sales up almost 29% from a year ago.

"In North America, automotive suppliers have been hit hard over the past few years -- volatile commodity prices, plunging production volumes, movement from larger to smaller vehicles and the historic bankruptcies of two OEMs," A.T. Kearney partner Dan Cheng said. "However, outside of the notable supplier bankruptcies, many suppliers were able to weather the storm through significant capacity reductions, restructuring and policy changes."

"In particular, Tier 1 suppliers were able to improve their working capital position over the past two years by significantly increasing their days payables to Tier 2 suppliers -- bringing in line their payment terms with the payment terms of their customers -- the OEMs. "

"Going forward, one risk is the speed of the industry recovery. As OEMs increase production to meet increased demand, suppliers will need capital to add capacity -- and also be convinced that the time to invest in additional capacity, after the drastic reductions of last year, is now."

That said, TheStreet has compiled a list of auto suppliers who -- according to the Altman Z-Score combination of five ratios, as researched though analytical tool I-Metrix -- face the risk of bankruptcy in the not so distant future, despite the fact that they have seen their scores improve over the last fiscal year. All these auto suppliers have Z-Scores of 1.81 or less, which according to I-Metrix, indicate a "very good chance" the businesses could go bankrupt in the coming year.

Included in the list is Visteon, which actually has been in bankruptcy protection, but iss expected to emerge from it in early October.

Also provided in the following pages are Moody's ratings outlooks for each company and assessments of the companies' creditworthiness or likelihood of defaulting. Typically, companies that receive ratings in the range of Aaa to Baa3 are considered to be investment grade, while those that receive assessments in the range of Ba1 to C are considered to be high-yield or non-investment grade or "junk." Thus, if a company is rated B1, Bloomberg would say the rating is four notches below investment grade. If a company is rated B3, Bloomberg would say the rating is six notches below investment grade.

Read on for five (excluding Visteon) auto supplier stocks that are still at risk of going bankrupt in the coming year according to the Altman Z-Score on I-Metrix.

>>>Also: Automotive Short Squeezes for 2010

5. ArvinMeritor (ARM)


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Altman Z-Score - Trailing 12 Months: 1.4

Altman Z-Score - Last Fiscal Year: 0.55

Moody's Rating: B3/Stable

Moody's Notes: "ArvinMeritor's B3 Corporate Family Rating reflects Moody's view that improving drivers of commercial vehicle demand have reduced the company's risk of default and will support credit metrics consistent with the assigned rating over the near-term. These drivers include improved year over year truck tonnage and improving truck load rates, as domestic economic conditions stabilize. These drivers are expected to support increased commercial vehicle demand to replace the existing fleet and provide trucking capacity for further potential improvements in economic conditions.

"However, Moody's continues to expect a recovery in North American commercial vehicle orders to be delayed until late 2010. About 52% of the company's fiscal 2010 revenues to date are from North America, where demand is expected to strengthen in the second half of the year. But with, approximately 21% of the company's revenue from Europe, a slower pace of economic recovery is expected to constrain overall growth. Tight credit markets also may limit near-term growth in commercial vehicle purchases.

"The stable outlook reflects Moody's expectation that the combination of stabilized industry conditions and operating improvements completed by ArvinMeritor will support the assigned rating over the near-term. The company's liquidity profile should support its operating flexibility into fiscal 2011 when global economic conditions are expected to recover more substantially."

4. Tenneco (TEN)


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Altman Z-Score - Trailing 12 Months: 1.3

Altman Z-Score - Last Fiscal Year: 0.72

Moody's Rating: B2/Stable

Moody's Notes: "Tenneco's B2 Corporate Family Rating reflects Moody's view that the trajectory of the company's performance and resulting credit metrics over the intermediate term will be favorably supported by recent trends in North American automotive production levels and our expectation that automobile registrations in Europe in 2010 will not lag the global recovery as dramatically as previously anticipated. Moody's expects this revised view of projected European registrations to benefit automotive production which was previously expected to decline 3% for 2010. Approximately 44% of Tenneco's revenues are in the company's European, South American, and Indian markets. While the North American operations of the Detroit-3 account for about 21% of the company's revenues, this risk is being partially mitigated by Ford's improving profitability and market share, and improving profitability and stabilizing market share for GM's retained product lines.

"These improved conditions will allow the company to leverage its improved cost structure through the remainder of 2010. Tenneco's aftermarket business (22% of revenues) also should benefit from increasing consumer spending as economic conditions stabilize. Higher commercial vehicle program launches to new customers beginning in late 2010 and into 2011 related to meeting emissions regulations also are expected to support the ratings.

"The stable outlook reflects Moody's expectation that Tenneco's credit metrics will support the assigned rating over the intermediate-term and incorporate the seasonal nature of the company's operations. Moody's also anticipates that Tenneco will benefit from higher levels of commercial vehicle program launches over the intermediate-term. However, improvements in the company's end markets may be weighed by the potential negative economic impact of government debt restructurings of certain Eurocurrency countries on financing availability."

3. Dana (DAN)


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Altman Z-Score - Trailing 12 Months: 1.25

Altman Z-Score - Last Fiscal Year: 0.96

Moody's Rating: B3/Positive

Moody's Notes: "Dana's B3 Corporate Family Rating (CFR) reflects the company's high leverage and substantial revenue decline over the last two years. The CFR also incorporates our expectation of the company's ability to sustain its improved first-quarter performance through 2010, its good liquidity profile with a strong cash position and access to external financing. However, operating performance will continue to result in EBIT (Earnings Before Interest & Tax) /Interest and free cash flow generation consistent with the rating over the near-term.

"These metrics incorporate the company's expectation of cash spending of approximately $100 million on additional restructuring actions to be taken in 2010, the likelihood of additional restructuring actions in 2011, and the much higher year-end 2009 underfunded pension liability amount which puts more pressure on leverage.

"The positive outlook incorporates Moody's view that Dana's improved operating performance in first quarter of 2010 quarter is sustainable over the near-term, given the improved automotive market environment in North America, and moreover, that announced spending for additional restructuring actions should further improve the company's operating performance and credit metrics into 2011. Moody's expects these actions to include, among other items, further rationalization of manufacturing locations and associated headcount. Dana's expected near-term more favorable operating performance along with its recent debt pay-down from the proceeds of the sale of the Structural Products business should provide ample financial covenant cushion to cover the potential implementation risks of planned restructuring actions. The company's financial flexibility also is aided by a strong cash position."

2. Federal-Mogul (FDML)


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Altman Z-Score - Trailing 12 Months: 1.22

Altman Z-Score - Last Fiscal Year: 1.07

Moody's Rating: B1/Stable

Moody's Notes: "Federal-Mogul's B1 Corporate Family Rating (CFR) continues to be supported by the company's strong competitive position and product lines within the automotive supplier industry. Federal-Mogul's aftermarket business, representing about 46% of revenues, has somewhat mitigated production volume declines in the company's original equipment business. Federal-Mogul also benefits from customer diversity with no individual customer accounting for more than 5% of the company's sales.

"However, the company's operating performance is expected to continue to reflect the dramatic decline of global automotive production from prior year levels and the bottoming out of global economic conditions. The B1 CFR is supported by the company's sizeable cash balance and lack of financial maintenance covenants which provide flexibility to effect additional restructuring actions. While the company's credit metrics are expected to sequentially improve over the coming quarters, they will remain weak for the assigned rating.

"The stable rating outlook reflects Moody's expectation for continued sequential improvement in Federal Mogul's operating results. Federal-Mogul's North American OE automotive sales (about 11% of total sales) should benefit from an expected improvement in automotive production levels in 2010. However, OE automotive production pressures in Europe (about 32% of total sales) are expected to continue into 2010. Somewhat balancing the company's revenue is its approximate 46% exposure to automotive aftermarket parts."

1. American Axle & Manufacturing (AXL)


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Altman Z-Score - Trailing 12 Months: 0.61

Altman Z-Score - Last Fiscal Year: -0.23

Moody's Rating: B2/Stable

Moody's Notes: "American Axle's B2 Corporate Family Rating reflects the company's improved operating performance over the past two quarters and Moody's belief that this improvement will be sustained over the intermediate term, supported by stable automotive vehicle production in North America and cost structure improvements completed by the company in 2009. While customer concentrations remain high to GM and Chrysler (approximately 78% and 8% of revenues for 2009, respectively), GM's improving profitability and stabilizing market share for its retained product lines partially mitigate this risk. Further, gradually improving domestic economic conditions and relatively low gasoline prices appear to be supporting sales of SUVs and light trucks. American Axle's major platforms continue to consist of SUVs and light trucks.

"However, Moody's believes the consumers' appetite for smaller cars is likely to grow over the intermediate term. American Axle also has stated that, as a result of achieved permanent structural cost reductions, the company's operating breakeven level is now down to a U.S. SAAR(Seasonally Adjusted Annual Rate) equivalent of approximately10 million vehicle units. This factor combined with our expectation of an 11.5 million U.S. SAAR in 2010 should support improved profitability over the near-term.

"The stable rating outlook incorporates Moody's expectation of a gradually improving operating performance from stronger North American automotive production levels in 2010 and into 2011. Over the intermediate-term American Axle's customer diversity is expected to benefit from a strong backlog of business which should increase penetration with other auto makers and geographic regions and further diversify the company's sales into passenger cars and cross-over vehicles."

Emerging From Bankruptcy: Visteon


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Altman Z-Score - Trailing 12 Months: 0.81

Altman Z-Score - Last Fiscal Year: 0.47

Moody's Rating: Withdrawn (Bankruptcy)

News and Commentary: Visteon exited bankruptcy protection on Oct. 1 after a federal judge approved an agreement between Visteon and former parent Ford, whereby Ford would, according to the The Detroit News, guarantee Visteon $600 million in business through 2013, as well as drop $160 million dollars in claims against it. At the same time, Visteon agreed not to pursue its claims against Ford any further, according to The Detroit News.

Visteon filed for bankruptcy protection in May 2009 after caving to the steep decline in the auto industry, which saw two of the Big Three Detroit Automakers -- GM and Chrysler -- file for bankruptcy protection last year. Ford ( F) of course was the only one of them that didn't. The Detroit News noted that Visteon got rid of $2 billion in debt through the bankruptcy process.

Currently, market research firm IBISWorld's risk analysis of the auto supplier industry ranges from low to medium-high. Three types of risk are recognized in its analysis: they include risk arising from within the industry itself, or structural risk; risks arising from the expected future performance of the industry, or growth risk; and risk arising from forces external to the industry, or external sensitivity risk.

The following data summarizing risk and market analysis of various sectors within the auto supplier industry has been provided by IBISWorld:

Automobile Transmission and Power Train Parts Manufacturing:
  • Size: $24 billion
  • Outlook: Average growth of 2.2% per year in the coming five years
  • Biggest Players: Dana (8.1% market share), American Axle (6.6%), BorgWarner (BWA) (5.6%).
  • Risk Score: 4.32. This industry falls within the medium-low level of IBISWorld's risk outlook for the coming 18 months.
  • AC, Exhaust, Air Bag, Wheel & Other Auto Parts Manufacturing:
  • Size: $29.5 billion
  • Outlook: Average growth of 7.6% per year in the coming five years
  • Biggest Players: Delphi (10.7% market share), Visteon (8.3%), DENSO (7.1%)
  • Risk Score: 3.88. This industry falls within the low level of IBISWorld's risk outlook for the coming 18 months
  • Automobile Electric & Electronics Manufacturing:
  • Size: $13.7 billion
  • Outlook: Average growth of 3.4% per year in the coming five years
  • Biggest Players: Delphi (29.3%), Visteon (17.4%), DENSO (15.8%), Robert Bosch (12.7%)
  • Risk Score: 4.91. Medium
  • Automobile Seating & Interior Manufacturing:
  • Size: $17.6 billion
  • Outlook: Average growth of 2.9% per year in the coming five years
  • Biggest Players: Johnson Controls (JCI)(21.8%), Lear (LEA) (17.1%), International Automotive Components (10%), Visteon Corp (5%)
  • Risk Score: 4.15. Medium-Low
  • Auto Parts Wholesaling:
  • Size: $129.3 billion
  • Outlook: Average growth of 2.8% per year in the coming five years
  • Biggest Players: Delphi (6.4%), Visteon Corp (6.1%), Robert Bosch (5.4%), Genuine Parts Company (GPC) (4.5%), Dana Holding (3%)
  • Risk Score: 5.16. Medium-High
  • Automobile Steering & Suspension Components Manufacturing:
  • Size: $9.3 billion
  • Outlook: Average growth of 2.3% per year in the coming five years
  • Biggest Players: TRW Automotive (TRW) (10.5%), Tenneco (6.3%)
  • Risk Score: 4.43. Medium-Low
  • In looking at the automakers themselves, S&P analyst Efraim Levy said in, a report, that for the first nine months of 2010 the Detroit 3 together claimed merely 45% of the market -- though this is still higher than the 43.8% share for the same period last year. Levy said he believes the recent uptick reflects a combination of easier post-bankruptcy comparisons, strong gains by Ford, increased demand for light trucks where domestic brands have a higher market share and quality issues at Toyota ( TM ) that have hurt its sales.

    Levy, citing Ward's Automotive Reports, said the Detroit 3 brands commanded 44.8% of the U.S. market in 2009, down from 48.1% in 2008 and 60.1% in 2004.

    While Levy believes that the recent market share gains for Ford appear to be real, "for GM and Chrysler it is harder for us to say." Levy said he has observed performance inconsistencies at both GM and Chrysler, noting that Chrysler, despite increased fleet sales, had year-to-year market share losses this year through July, before sales strength in August and that September resulted in positive comparisons in the aggregate during the first nine months of 2010.

    GM's year-to-date market share losses, meanwhile, have widened in the past two months, according to Levy.

    -- Written by Andrea Tse in New York.

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