Description

Company Overview

Autoneum was formerly a business segment of Rieter Holding AG (RIEN SW) until it was spun-off on 5/13.  The stock quickly traded to SFr119 but has barely managed an uptick since, losing 1/3^rd of its value since the second day of trading.  Rieter is a Swiss industrial firm that's a well-run, albeit sleepy and uninteresting conglomerate.  They previously had two divisions: Textile Systems, and Automotive.  The textile business sells capital equipment used for spinning and producing yarn (I warned you it was boring).  There isn't much growth in the textile business but it has a surprisingly high ROIC and it generates nice cash flow.  The auto business was entered in the mid 80's and it's grown steadily since.  Management felt the auto business was ready to stand on its own although with spinoffs it's safe to assume that there are other motivations involved.

Rieter's automotive business, now Autoneum, is a large player in acoustics and thermal management parts and systems.  What does that mean?  These are various types of covers and panels that are affixed to other parts inside the vehicle.  Behind the dashboard, for example, a car will need a protective layer of synthetic material that dampens engine noise and absorbs heat.  Same thing for the wheel wells, the underside of the hood, trunk, etc.  Autoneum has spent decades working on the materials and design of these parts in order to perform better, reduce weight, and improve cost.  They have 48 plants around the world while sales are 54% in Europe, 33% North America, 9% LatAm, and 4% Asia.  Here's the company presentation which can provide more details about what they sell and to whom, and here's another presentation that goes into some more detail about the spinoff.

Financially speaking, Autoneum looks like most other auto part OEM's.  Its sales growth follows vehicle production growth while EBIT margins are in the mid-single digits and ROIC is in the low teens.  Nothing about Autoneum stands out from the crowd, it looks pretty much like what you'd expect, which is to say a typical auto parts OEM whose fortunes generally rise and fall with the industry.

In early 2008 Rieter management undertook a broad restructuring of the company.  The moves included shutting down Western European manufacturing plants and moving them to Eastern Europe (cheaper labor, closer to customer plants), layoffs and plant closings in North America, a reduction in corporate overhead, a shift to more temporary workers, and disposal of some smaller non-core businesses.  The result has been lowering the EBIT breakeven point on revenue from about SFr2,000m to SFr1,625m.  The total expense cuts were SFr195m, but importantly only 2/3^rd of it has been realized so far.  Management expects the remaining SFr65m to be recognized by the beginning of 2012 (restructuring in Western Europe is notoriously difficult, as most readers probably already know).  I believe these additional expense reductions will play a major role in allowing Autoneum to achieve EBIT margins above their previous average.

Financials

The company has 4.6m shares outstanding, SFr256m in debt and SFr123m in cash.  Historically, Autoneum had EBIT margins of 5.0% which was below the global auto OEM average of 6.2% and European average of 7.2%.  Margin ranges from company-to-company are surprisingly tight; there are only one or two outliers in either direction.  The value proposition is pretty simple.  If Autoneum returns to historical margins of 5%, which seems like a layup given the restructuring (almost every auto parts OEM has brought margins back to historical levels), it would produce EBIDTA of SFr175m and EPS of SFr12.00.  Comps trade at 6.5x trailing EV/EBITDA (5.4x current year) and 12.5 trailing P/E (11.5x current year).  This would imply that Autoneum is worth between SFr138-175/share for 65-110% upside.  I would call this a base case as it assumes average margins.

Where things get interesting is when you factor in the remaining cost cuts of SFr65m, most of which should fall to the bottom line from here on out.  Holding revenue assumptions constant, I estimate EBIT margins would expand to something more like 7%.  While this is above Autoneum's historical average it's by no means a heroic assumption since that's close to every other European OEM margins.  This new margin structure would produce EBITDA of SFr218m and EPS of SFr18.00, implying a fair value of SFr205-225/share.  I forecast revenue growth based on the weighted average sell-side estimates for revenue growth of their customers.  Autoneum's sales are more volatile so while they did worse during the downturn (negative 20-30% sales vs customers negative 7-12%) they should do better during the rebound.  I've only budgeted for them to perform slightly better.

EV/Sales is a good sanity check for companies like this.  Autoneum has the lowest multiple I can find and trades at a huge discount to the group average.  Same thing goes for book value.  I wouldn't use book value to determine what a company comprised of specialty assets is worth, but it's nevertheless a good indicator of whether you're in the right ballpark.  Same thing as before, Autoneum trades at a large discount to the group and is again the cheapest company by a considerable margin. 

No single competitor is a perfect comp for Autoneum, but ElringKlinger AG (ZIL2 GR) is probably the closest in terms of products and company size.  Somehow they manage ridiculously high margins (mid teens) so I wont single them out.  I confess to only being in the process of figuring out why they are so much more profitable and what additional hope that might spell for Autoneum.

The downside looks pretty much baked into today's stock price.  With an EV of SFr515m, the stock is trading at 4.8x trailing EV/EBITDA on trough margins.  They earned SFr22m in EBIT in 2010 versus SFr85-110m in prior "normal" years.  DD&A run-rate is about SFr82m, so the company is today being valued as if 1-2% EBIT margins are the rule.  Even if Autoneum, for whatever reason, is only able to generate 3-4% margins it would still produce SFr145m in EBITDA and SFr7.10 in EPS, implying a fair value between SFr79-120/share.

I have no unique insight on the auto industry, but I suppose I can cite a couple stats that leave me somewhat encouraged.  1) New car inventory in the US is near the lowest it's ever been, and by a rather significant amount.  2) Further supply tightness from Japan should help pricing (good for companies whose production/sales weren't hurt, such as Autoneum).  3) US and European light vehicles sales are still 20-25% off pre-recession levels.  The main risk seems fairly obvious: deteriorating macroeconomic conditions affect consumer spending.  I wont argue with anyone if they have strong feelings for against this industry right now.

The leverage is quite manageable at 1.2x net debt-to-EBITDA, and the company's capex guidance is modest, a level that offsets DD&A. 

Plus you get a free kicker with the Swiss Franc exposure, if you're into that sort of thing.

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