Why Federal-Mogul Shares Skyrocketed

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Federal-Mogul (NASDAQ: FDML  ) , an auto parts and vehicles components supplier, soared 26% after the company handily topped Wall Street's EPS expectations in the second quarter.

So what: For the quarter, Federal-Mogul reported a 6% increase in sales to $1.77 billion and saw profits rise to $0.57 per share, decisively reversing a year-ago loss of $0.60 per share. Comparatively, Wall Street was forecasting sales of $1.73 billion and a profit of just $0.39 per share. Federal-Mogul benefited from a stabilization in European sales, as well as closures of factories in North America and Western Europe, which helped bring down expenses.

Now what: Given Federal-Mogul's shaky history, I can't say I'm much of a fan of the company. It emerged from bankruptcy some five years ago right into the deepest recession we've witnessed in 70 years – hardly what I'd call great terms. Although its European business is improving, Europe itself isn't expected to show signs of life for years because of steep spending cuts, meaning that Federal-Mogul's cost-cutting initiatives will only drive the bottom line so far. The "X factor" here, though, is Carl Icahn, who owns a majority stake in the company. Icahn is an activist investor that's known for turning frowns upside down in the business world and could single-handedly allow calmer heads to prevail over the long run. Personally, I'd suggest waiting a few more quarters to see if this turnaround is for real or just an anomaly among a series of bad quarters.

With Europe struggling and U.S. auto sales advancing at a snail's pace, automakers and supplier are turning to China, the world's largest auto market, for their next great growth opportunity. A recent Motley Fool report, "2 Automakers to Buy for a Surging Chinese Market", names two global giants poised to reap big gains that could drive big rewards for investors. You can read this report right now for free – just click here for instant access.

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9/29/2016 4:00 PM
FDML $9.42 Down -0.15 -1.57%
Federal-Mogul CAPS Rating: **