Earnings Preview: Auto Suppliers

The continued decline in North American automotive production is expected to weigh heavily on the second-quarter results of auto suppliers, especially those heavily dependent on light truck production at the U.S.-based automakers.

In recent months, record-high gas prices and a slumping overall economy have prompted many Americans to put off buying a new vehicle or switch from a gas-guzzling sport utility vehicle or pickup truck to a more fuel-efficient passenger car.

The drop in demand has forced automakers _ especially General Motors Corp., Ford Motor Co. and Chrysler LLC _ to cut production, and as a result, orders to their suppliers.

Citi's Itay Michaeli said he expects volatile results from the automakers and their suppliers this quarter.

"Weakness in the domestic economy, uncertainty surrounding the viability of Detroit Three, potential weakness in Europe following an 8 percent decline in June sales in that region, and persistently high raw materials prices should remain foremost in the minds of management and investors," Michaeli wrote in a note to investors.

Wachovia's Richard M. Kwas said North American automotive production dropped about 16 percent during the second quarter and included a 26 percent drop in truck production at the Detroit-based automakers.

Specifically, production of large light trucks at GM, Ford and Chrysler fell about 40 percent. Kwas said that drop is expected to most hurt companies such as American Axle & Manufacturing Holdings Inc., Lear Corp., Magna International Inc. and Tenneco Inc.

American Axle is scheduled to report its results Friday, with Lear following July 29 and Tenneco on July 31.

"Expectations are low," Kwas said. "That said, better-than-expected performance may be viewed skeptically by the market given expectations for continued volatility in near-term fundamentals (unit sales and mix, etc.)."

The suppliers are also expected to be significantly affected by the nearly three-month-long strike at American Axle that ended in June and reduced GM's production by hundreds of thousands of units.

While the strike is expected to most hurt American Axle, which derives about 80 percent of its total sales from GM, Magna, Lear and Tenneco also have significant GM exposure, Kwas said.

Both Michaeli and Kwas pegged BorgWarner Inc., which makes automotive systems and drivetrain components, as their top pick in the sector, citing its strong finances and diverse product lineup. The Auburn Hills, Mich.-based company reports its results July 31.

Johnson Controls Inc., which makes building and automotive systems, kicked off the sector's reporting last week with a fiscal third-quarter profit that met Wall Street predictions, largely as a result of a 13 percent increase in building efficiency sales. Sales at the company's automotive division rose 3 percent.