Is auto parts maker Visteon a good value?

On the heels of the GM ipo yesterday, I’m tossing out auto parts supplier Visteon (VSTO) as a potential side play. In the interest of full disclosure, a colleague at a large hedge fund asked me to take a look at this company and toss in my two cents. Yes, his firm does own Visteon stock and no, I do not own any myself.

The questions is this: Is Visteon a good buy right now? Let’s see if we can find out.

Some background
The Visteon background information that I received from my colleague at the large hedge fund just so happens to read word-for-word like a recent article published on SeekingAlpha by an unnamed hedge fund manager (though I do have my suspicions on who that might be). You can go here to read the details for yourself. For you lazy lunkheads, I’ll summarize the highlights:

Visteon supplies climate, electronic, and interior systems and parts to auto makers. Before the company went into bankruptcy in May of 2009, it was operationally clunky with a only a single client: Ford. Bankruptcy freed the company of previous debt while streamlining operations and diversifying its customer base. Ford now accounts for only 30% of its business with Hyundai close behind at 27%. Other auto manufacturers take up the remaining slack.

Visteon valuation
The majority of the company’s profits comes from a 70% stake in Korean climate control manufacturer Halla (whose major customer is Hyundai) and a 50% joint-venture in Chinese auto parts supplier Yanfeng which has a globally diversified customer base.

Using what is called a “sum of the parts” valuation, the follow table shows the range of valuations based on next year’s (2011) EBITDA projections. The numbers were calculated assuming multiples of 3.5 – 4x, conservative by industry standards. (An average multiple for the auto parts industry is 5.5x according to Bloomberg.)

So, how does the current stock price compare with the above valuation? Let’s take a look at its chart.

Visteon chart evaluation
The newly refurbised Visteon resurfaced less than 2 months ago on 9/27 at $50. Since then, its stock price has motored up 30%. Don’t get too excited–so has Ford’s.

[Technical note: Major support/resistance levels at $5 increments; minor ones at the $2.50 and $7.50 marks. The stock is not optionable (as of this writing).]

What the chart seems to be saying is that at current prices, “core Visteon” (the company sans Halla and Yanfeng) can be had for next to nothing. Maybe that’s because core Visteon isn’t really worth much..? I can’t say as I don’t know what constitutes the core property. One thing I can say, though, is that on 10/29 insiders sold Visteon stock to the tune of $6.5M with the CEO selling $2.2M. That alone should tell you something.

But even if core Visteon isn’t worth much, the stock still is a decent value relative to its industry peers, at least on the books. Does that mean that I’m going to rush out and buy the stock? Not right away. In a sense, this is a brand new company and as such it doesn’t have an established track record.

Possible sale?
For one thing, management effectiveness needs to be demonstrated. Will they be able to keep up with the competition and generate new sales?

Only time can answer that question but one thing is clear: management is committed to unlocking value. The pre-bankruptcy bond-holders are in charge of the board and current management has stock incentives to help them realize shareholder value.*

These incentives include selling off parts of the company to rivals. In fact, Johnson Controls (JCI), one of its major competitors, made a low-ball bid for part of Visteon’s interior and electronics business while it was in bankruptcy. If JCI wants to up its bid, the board may take the offer seriously. (FYI: Other close competitors and possible buyers are French auto parts maker Valeo (VLEEY), Magna Int’l (MGA), Borg-Warner (BWA), and TRW Automotive (TRW).)

The bottom line
Visteon’s fate, along with its peers, ultimately comes down to auto sales. I know, duh. But it does look as if the industry is on the mend with Ford projecting continued sales growth for next year. And Hyundai just beat third-quarter profit expectations with robust demand coming from emerging markets.

That all bodes well for Visteon.

*Dr. Kris on her soapbox: Wouldn’t it be nice if the high salaries and perks enjoyed by a company’s senior officers were enough of an incentive for them to do their jobs?

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