Talk about a wacky market.
When was the last time a consumer cyclical stock in the auto and truck parts segment soared over 100% in a single day? Today.
China Automotive Systems (NASDAQ:CAAS) announced today that its 51%-owned subsidiary, Zhejiang Heglong & Vie Pump, has been selected as the exclusive supplier of steering pumps for a General Motors (NYSE:GM) joint venture in China.
So, why did an order for 10,000 pumps in 2005, along with another supply agreement for fuel pumps to Dong Feng Liuzhou Motor, increase China Automotive's market capitalization by $175 million today?
China Automotive's stock had declined since reporting third-quarter results that showed sales rose 11.5% and net income managed a 4% gain over the same quarter last year. That's hardly the heady stuff that makes for a bottle-rocket stock -- especially when sales for the quarter are $14 million and the stock today has a market capitalization of $345 million.
The company's stock took off in mid-October with the announcement that it had been selected for the Halter USX China Index (INDEX: HXC) -- an index of 38 companies that do business in China but have publicly traded stock in the United States. Rubbing "index elbows" with the likes of PetroChina (NYSE:PTR) and Chinadotcom (NASDAQ:CHINA) was certainly profitable for China Automotive shareholders. The stock soared from a low of $3.50 on the day of the announcement to a $14.48 high one week later.
China Automotive is a leading supplier of power steering components and systems to the Chinese automotive industry. It has long-term contracts with more than 40 vehicle manufacturers. Its 18% operating margins far exceed those of global automotive parts suppliers Visteon (NYSE:VC) and Delphi (NYSE:DPH).
The one analyst who follows the company expects it to earn $0.40 a share this year -- which puts its price at a multiple of 38 times 2004 earnings. Although that analyst expects earnings to increase 33% next year, the price is still a rich 29 times 2005 earnings for a niche player in a cyclical business. Presumably, though, these estimates don't explicitly factor in this latest contract.
Today's order announcement confirms the company's hold on a niche market -- but in a world dominated by integrated parts suppliers. While this company might be an interesting acquisition when niche players eventually get consolidated, if I had to make a guess (considering that we don't know what the ultimate windfall from this contract is going to look like), I'd say that today's stock market action is too much zoom, too early. Besides, why pay top dollar (or yuan) for a parts supplier? There is worldwide competition and this company's high margins will presumably attract the attention, and resultant competition, of low-cost providers.
Hey, looking for what to do with all that leftover turkey? Visit the Recipes and Cooking discussion board after stopping by to discuss China Automotive with other investors. The Motley Fool is investors talking to investors.
Fool contributor W.D. Crotty does not own stock in any of the companies mentioned.
