As the markets trade at all time high levels, it is becoming more and more difficult to get value bargains. As a result, the focus is shifting to finding decent companies with strong earnings potential. These picks of course come at relatively higher levels than what investors were able to lay their hands on six months ago. Federal-Mogul Corporation (NASDAQ:FDML), Textron Inc. (NYSE:TXT), and Remy International Inc (NASDAQ:REMY) are some examples of such stocks where the prospects of future earnings are driving prices.
Federal-Mogul : Big opportunities in auto parts
Auto parts maker Federal-Mogul Corporation (NASDAQ:FDML) has a number of things going well at present. First off, the company reported a bumper financial performance in the latest quarter ended June 30, 2013. The vendor swung to a profit of $56 million compared with last year’s loss of $59 million – a comprehensive change of $115 million in total. The fact that Federal-Mogul is headed for better times ahead is no longer a secret and this is very well established as activist investors Carl Icahn and Mario Gabelli are boosting their stakes in this company.
Unlike most other companies in this space, Federal-Mogul Corporation (NASDAQ:FDML) has a relatively higher proportion of revenues coming from North America, where the automotive market is recovering fast and margins are better. In the most recent quarter, North America contributed nearly 44 percent of Federal-Mogul’s revenues. A look at the valuation metrics reveals the stock is not expensive, although it is not something that can be classified as bargain as well. Forward price earnings ratio of 14.2 is attractive while debt equity ratio of 4.2 is on higher side. However, the involvement of Icahn and Gabelli means investors can expect to see some progress in efforts to reduce gearing.
Remy International’s stock jump
Remy International Inc (NASDAQ:REMY) – a manufacturer of electrical components for automobiles and light trucks – has been reporting excellent financial performance in recent quarters. In the year ended December 31, 2012, the company reported a 92 percent jump in earnings to $138.6 million. Although performance deteriorated in the first quarter as earnings fell to just $1.3 million, it was largely due to one-time severance costs related to departure of former chief executive.
The market took these results in stride and the stock has jumped nearly 20 percent over the last three months. Fundamentally, the stock is attractively priced considering a forward price earnings ratio of 10.6. Analysts at B. Riley & Co. have resumed their coverage on the stock with a Buy rating and price target of $23. A forward price earnings ratio of 10.6 and a price by sales ratio of 0.56 indicate there may be upside left in the stock.
Textron under pressure by activist investors
Textron Inc. (NYSE:TXT) is another auto parts vendor that is a center of attraction among big investors although it has interest in other industries as well including aircraft and defense. The stock trades at a price earnings ratio of 15.5 but this metric reduces to an impressive 11.7 for a forward basis. At the same time, a price by sales ratio of 0.65 and a debt equity ratio of 1.15 are indicators that the stock is attractively priced. Without doubt, these valuation numbers are good but there is a larger development going on at the company.
Textron Inc. (NYSE:TXT) management is being pressurized by activist investors to break up the company and sell some businesses. An analyst at Royal Bank of Canada wrote that the company’s valuation could be as high as $42 per share if the restructuring goes through. This compares to current market price of $27.6, offering a potential upside of 52 percent.
Conclusion
The rally in auto component stocks can be expected to continue as vehicle sales grow on the back of a resurging economy. Out of these stocks, Textron Inc. (NYSE:TXT) offers an immediate upside while Federal-Mogul Corporation (NASDAQ:FDML) is expected to be an outperformer. Remy International Inc (NASDAQ:REMY) is a black horse and the value unlocking will depend on how the company performs in the next quarter.
