Martinrea stares down storm

The auto parts industry faces turmoil, but acquisitions may help firm cope

GREG KEENAN
November 14, 2007 at 6:05 AM EST

If there's a company that appears to be in the midst of a perfect storm, it's auto parts maker Martinrea International Inc.

Three of the company's four largest customers are the battered Detroit Three auto makers, which are slashing production and beating up their suppliers, it has many plants in Canada where the high dollar is driving up costs and it has been on an acquisition spree.

What Martinrea and the rest of the auto parts industry are facing is in fact a perpetual storm, acknowledged chairman Rob Wildeboer, but he pointed out that investors should see this as an opportunity for Martinrea, a maker of structural auto parts such as truck frames and chassis supports, as well as vehicle fluid management systems.

The troubles of the industry actually put Martinrea in good stead, Mr. Wildeboer said, because it has little debt and a decent stash of cash with a recent share issue, leading-edge technology in metal forming and a strong geographic footprint in Canada, the United States and Mexico.

"We've raised our capital in Canadian dollars, we have very good debt capacity and we have the ability to effectively move production around to suit the needs of our customers," he said.

Auto makers are looking for financially strong suppliers with technical solutions that reduce vehicle weight and improve quality, he said.

Martinrea is a year removed from the most recent of several acquisitions.

The purchase of the North American body and chassis operations of ThyssenKrupp AG more than doubled the company's revenue and it picked up plants in Mississippi, Kentucky and elsewhere in the growing auto assembly region of the U.S. South. The deal also gave it a foot in the door with Nissan Motor Co. Ltd., which will begin to reduce Martinrea's reliance on Chrysler LLC, Ford Motor Co. and General Motors Corp.

The former ThyssenKrupp plants hold the key to where Martinrea's stock price is going, analysts said. It has fallen in recent weeks after hitting a 52-week high of $19.13 on Oct. 10, sent down in part by the dollar and the share issue, which raised $126.9-million.

The issue is increasing capacity utilization and thus improving profit margins by filling up those plants with new business.

Martinrea reported yesterday that profit rose to $15-million or 23 cents a share in the three months ended Sept. 30, from $7.5-million or 12 cents a share a year earlier. Revenue more than doubled to $476.2-million from $174.1-million.

Announcements of new contract awards during the third-quarter financial results conference call today would boost the stock, said Michael Willemse, who follows the company for CIBC World Markets Inc. in Toronto.

"I think investors are starting to get a little nervous because nothing has been announced yet," said Mr. Willemse, who rates the stock sector perform, has a target price of $18.50 and thinks it has been oversold in recent weeks.

A case in point on underutilization is the company's plant in Kitchener, Ont., which is Martinrea's largest facility at more than one million square feet and is operating at about 50 per cent of capacity.

That's because it makes frames for just one line of vehicles - GM's mid-sized sport utilities - sales of which have slumped amid high gas prices and the rise of crossover utility vehicles.

"The future of the product that is in Kitchener largely will depend on the customer."

There's also the question of what the company plans to do with the money it raised recently. Any acquisitions are likely to be in Mexico or the United States so the company can benefit from the strong Canadian dollar and win business with new customers, Clarus Securities Inc. analyst Youssef Abboud said in a note to clients. Mr. Abboud rates the stock a buy and has a 12-month target price of $21.

Companies with sales in the $100-million to $500-million range are most vulnerable to the problems now afflicting parts makers, said Mr. Wildeboer.

"It may very well be that we're going to do some shopping," he said.

Much of the pain being experienced by the Canadian auto parts sector won't be evident until the first quarter of next year, said Bob Tattersall, executive vice-president of Howson Tattersall Investment Counsel, which holds more than 700,000 Martinrea shares. Martinrea is an exception, Mr. Tattersall noted, because of strong management, technological prowess and the diversity acquired from ThyssenKrupp.

As a shareholder in ThyssenKrupp Budd Canada Inc. before minority shareholders were bought out, he had some knowledge of what Martinrea was getting into with the ThyssenKrupp purchase.

"I was worried when they acquired Budd because our experience was that it was a sinkhole," he said. He now describes himself as pleased that Martinrea has done well with the acquisition.

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Quick facts

Management: A strong cadre of ex-Magna International Inc. senior executives, including CEO Fred Jaekel and president Nick Orlando, who were in top jobs at Magna's Cosma International metal-forming division.

Acquisitions: Pilot Industries Inc., Depco International Inc., North American body and chassis operations of ThyssenKrupp AG

Biggest customers: Chrysler, Ford, General Motors and Nissan represent 77 per cent of annual revenue of about $2-billion.

Key vehicle programs: GM full-sized pickups, mid-sized SUVs, Ford Fusion sedan, Edge and Lincoln MKX crossover utility vehicles

Emerging markets: Plans to open plant in Slovakia, has joint ventures in China.

Technology: Includes hydroforming, which is the use of high-pressure water to shape and form metal tubing. Another is hot metal stamping. Metal is heated almost to a molten state, then stamped into a part such as a door pillar.