After 18 straight months of crushing analyst estimates, automotive-parts maker TRW Automotive (NYSE:TRW) finally stumbled and "missed earnings" in its third quarter. When it reports fourth-quarter and full-year earnings on Thursday morning, can it get back on track?

What analysts say:

  • Buy, sell, or waffle? Ten analysts inspect TRW, which garners five buy ratings, four holds, and a sell.
  • Revenues. On average, they're looking for less than 1% quarterly sales growth to $3.16 billion.
  • Earnings. Profits are predicted to plunge 93% to $0.03 per share.

What management says:
The big news at TRW this quarter concerned a seismic shift in its capital structure. Aiming to buy out Northrop Grumman's (NYSE:NOC) nearly 11% stake in its shares (a vestigial asset dating from Northrop's acquisition of TRW's space arm), and needing to come up with $210 million for the purpose, TRW issued and sold 6.7 million new shares of common stock, netting $155 million (after fees) from the offering. It then used this cash to repurchase the 9.7 million shares of its stock that Northrop held.

In other news, TRW has poetically described the current market for auto parts as "precipitously more difficult." Even so, CEO John Plant promised to deliver "profitable operating growth in 2006 ... offsetting lower customer production in North America with higher product volumes in Europe, Asia, and other parts of the world, which together represent 66% of our sales." By emphasizing sales to more profitable foreign builders, Plant said, the company will attempt to navigate the current "unprecedented level of recent production cuts by our major North American customers."

What management does:
Is that just a pipe dream -- an auto-parts maker growing its profits, even as most of Detroit's profits are going up in a flaming heap of burning cash? It sure sounds unlikely, but TRW's numbers argue the contrary. Despite a rough third quarter, the firm's gross margins continue to come in consistently near 11%, and it's been holding the line on net margins at 1.6% for an entire year. (Operating margins, however, are showing signs of weakness.)

Margins

7/05

9/05

12/05

3/06

6/06

9/06

Gross

10.7%

10.3%

11.0%

11.2%

11.2%

10.9%

Operating

5.8%

5.7%

5.2%

5.7%

5.5%

5.4%

Net

0.7%

0.7%

1.6%

1.6%

1.6%

1.6%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Getting back to the buyback, a Fool might be forgiven for wondering just what happened here -- TRW issued stock so as to raise funds to buy stock? Well, yes, it does sound a little weird. But this deal actually made a lot of sense, for two reasons.

First and foremost, there's the price. At $210 million for 9.7 million shares, TRW paid $21.65 per share to buy Northrop out. Considering that the stock's trading at $29.83 as of this writing, I'd call that a bargain.

Second, TRW had little choice in the manner of raising the necessary cash. Carrying more than $3 billion in debt on its balance sheet, against less than $400 million in cash, the company was too cash-poor to finance the buyback on its own and still keep adequate money on hand to fund its business. It needed to tap the public markets to take advantage of this incredibly good deal. My opinion: This was absolutely the right call.

Competitors:

  • Autoliv (NYSE:ALV)
  • Eaton (NYSE:ETN)
  • Illinois Tool Works (NYSE:ITW)
  • Textron (NYSE:TXT)
  • Visteon (NYSE:VC)

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Fool contributor Rich Smith does not own shares of any company named above.