Visteon (NYSE:VC), a supplier to the automotive industry, is about as unloved as you can get. Let us count the ways.
No. 1: Loved stocks often trade at many times total revenue. Granted, price-to-sales isn't an ideal multiple, since it doesn't work well for evaluating stocks with different debt levels. For a quick comparison, though, Anheuser-Busch (NYSE:BUD) sports a debt-to-equity level nearing Visteon's ballpark and trades at 2.5 times sales. Visteon, meanwhile. is priced at 0.04 times sales, the same as nearly bankrupt Delta Air Lines (NYSE:DAL). Yikes!
No. 2: Look at this five-year chart. A declining stock price is a true, and obvious, hallmark of the unloved.
No. 3: As General Motors (NYSE:GM) did with Delphi (NYSE:DPH), Ford (NYSE:F) spun off Visteon in June of 2000 so the parts suppliers would grow more quickly by sharing its technology with the world's other automakers. In reality, this is what happened: Ford gave an unloving boot to a low-margin parts supplier with little strategic value and lots of future write-offs.
No. 4: In 2003, Visteon wasn't falling in love with its books, so it took write-downs and other charges of $756 million ($6.02 a share at the time) -- all related to a restructuring of its relationship with Ford.
No. 5: In 2004, the company continued to dislike its books and took $1.26 billion ($10.08 per share) more in write-downs and special charges. That's not small change for a company doing just under $19 billion in revenue per year.
No. 6: Visteon's 2004 results were mixed. Non-Ford revenue grew to 30%, 5 percentage points over plan, while revenue, at $18.7 billion, was at the midpoint of guidance. But net income came in at a loss, and there was no free cash flow. And those are the numbers that count most.
No. 7: Through its roughest years, 2003 and 2004, the company paid a quarterly dividend. With a net debt (debt minus cash) of $1.2 billion and lots of business uncertainty, why wasn't the company attached to that cash and saving it? Instead, it has seen its cash balances decline and suspended the dividend just last month.
Is it any wonder the company is unloved?
Well, then, why was its stock up as much as 18% today? Chalk it up to an announcement that the company has entered into a financial agreement with Ford -- an agreement that's "mutually beneficial" and "will improve Visteon's operating results and cash flow."
So let's add this up. Visteon has been taking write-downs and hasn't been able to hit earnings guidance. Now, through a restructured deal with its former parent (where it also has declining sales), there's supposed to be light at the end of the tunnel? Color me skeptical. Consider, too, that analysts are guessing the company will earn $0.06 a share in 2005. That would give the stock a sky-high forward price-to-earnings ratio of 119.
For my money, I'd have to go with niche players in the auto-parts business, since specialists could be the only ones with the opportunity to turn sweet profits.
Visteon, which isn't a specialist, is still looking for love. So far, it isn't clear the company can produce strong profit margins, and that's what it probably needs most right now.
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Fool contributor W.D. Crotty does not own shares in any of the companies mentioned, but he loves any day on which the car runs. Click here to see the Motley Fool's disclosure policy.
