I know every cloud is supposed to have a silver lining, but where's the good news for vehicle component companies like ArvinMeritor (NYSE:ARM)? Detroit can't move cars unless they offer cut-rate pricing, Japan is still a tough market, and it looks like 2006 will be at least a temporary peak in big truck demand.
That's a tough row to hoe, but there may be more than meets the eye with ArvinMeritor. First things first, though. Let's look at the fourth-quarter report.
Performance was not all that strong versus last year, but then, most people didn't expect it to be. Sales rose 6% as double-digit growth in the commercial vehicle business offset nearly stagnant performance in light vehicles. Gross margin worsened a bit, as did operating margin (even adjusting for special restructuring costs), and income from continuing operations (again, adjusted) was down a bit from last year.
Cash flow, too, was no treasure to behold. Free cash flow was negative for the year, reversing a positive result in the year before. On a brighter note, though, cash flow in the second half of the year was positive, and management seems to expect that momentum to continue into the next year.
While ArvinMeritor may look like just another vehicle components company going through some tough times, there's more going on beneath the surface. First, the company gets only about 20% of its sales from the Big Three in the U.S. (Ford (NYSE:F), General Motors (NYSE:GM), and DaimlerChrysler (NYSE:DCX)). The fact that the company makes sure to point that out tells how tough conditions still are there.
More importantly, though, the management team here is pretty new and is reshaping the company along the lines of good business sense. Acceptable businesses have to be leaders (or likely to become leaders) with competitive advantages and good returns on capital. As a result, the company is trying to shed more of its light vehicle businesses, but the process will take some time, as the current market for light vehicle component businesses isn't too strong.
Although big truck demand looks like it will fall off in 2007, ArvinMeritor is not overexposed to that business. What's more, it looks to stand out from rivals such as Dana (NYSE:DCN), Eaton (NYSE:ETC), and Tenneco (NYSE:TEN) with new commercial emissions products. Growth in market share could help offset overall market sluggishness.
By no means is this stock suitable for everyone. Furthermore, value-oriented investors will have to make their peace with the fact that this could very well be dead money for some time, as worries about the auto and truck industries stay in the headlines. Patient investors, though, may find that the sum of the parts at ArvinMeritor is a bit more interesting than would first appear.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
