Description

Summary:

Strattec is a secularly challenged auto parts supplier that is substantially over-earning due to one-time work associated with the GM ignition switch recall initiated earlier this year and widely publicized in the media. We believe that this one-time recall revenues account for nearly 1/3^rd Strattec’s LTM EPS and that investors are capitalizing this $2 of earnings at a very high rate and also ascribing the core STRT business a premium multiple on top of this. Our thesis is simple: we expect the company will have one more quarter aided from GM recall work (about a $.35 bump to earnings that is well understood) before the business returns to normal, at which point the stock should return to its historical valuation levels on a lower EPS number. The stock has rallied from $45 at the start of 2014 to $80 today. We expect a big chunk of this appreciation to disappear. If things don’t go our way, and the company ex-GM performs exceptionally well, it should be hard to lose much money here given the enormous headwind to EPS from the GM recall work that will be virtually impossible to replace in one year from new business wins or increased production. As an added kicker, we think the core business has tremendous potential secular issues driven by cars increasingly incorporating electronic features that replace mechanical features– ultimately we believe nearly 2/3rds of revenue is at risk of going away over the next decade.

We believe the opportunity exists because Strattec has minimal analyst coverage, holds no conference calls, has a modest disdain for short-term oriented investors, and is owned by un-concentrated vanilla mutual funds. Short interest is also very low (6%). Further, we think investors are ignoring a multitude of other issues that put core earnings at risk, including secular challenges in 2/3rds of the business, strong growth in underlying customer volumes that are unlikely to be sustainable, some one-time channel fill in the most recent quarter that analysts have projected forward, and a mix shift of growth in profits towards business divisions with substantial minority interest. To be fair, the company has performed well ex-GM recall revs, with revenues up in the low teens, which drove the stock price increase from $45 to the $60s earlier this year. For reason we will detail, we believe this performance is unlikely to be sustainable and has been misunderstood by the market.

Ex-GM recall work, we think the company on an LTM basis has earned closer to $4.16. At today’s price, that equates to nearly 20x LTM earnings. Annualizing the recent business wins and giving the company credit for additional margin expansion, we can get to generous normalized earnings at current North American auto production rates of about $5.00 or over 16x forward earnings vs. peers who trade at 12x forward. Further, we get free call options on secular challenges, long-term margin pressures, and arguably peak US auto-production, that could materially adjust earnings downward below our $5.00 estimate.

Business Overview:

Strattec is a US based supplier of auto parts to automotive OEMs - the big three US automakers (Chrysler, GM, and Ford) make up roughly 2/3rds of their sales. Strattec was originally part of Briggs & Stratton before being spun off in 1995. At the time of the spin, Strattec generated nearly all its revenue from keys and locksets and had dominant share of these products with the big 3.

The company ceased disclosing these numbers in 2009 after ceding share for years. As technology has advanced, mechanical keys & locks have come under pressure. Strattec began to expand to other product categories, including latches, door handles, trim, and driver control products. Further, as foreign manufacturers opened US manufacturing plants, they brought their foreign suppliers with them (eg Huf, U-shin, etc) creating more competition in the core business. More recently, new technology like push start, passive entry, and smart keys are creating more substantial risk to Strattec’s core business. All these factors have resulted in share and content losses in the core keys & lockset biz. Today we estimate about 64% percent of the biz (adjusting for minority interest) relates to legacy products with secular challenges, with the rest coming from the newly created business lines.

What bulls see and what creates the opportunity:

On its surface, Strattec looks like a rapidly growing, high performing auto parts supplier. At a casual glance, growth (especially the recent growth) has been impressive.

Recent growth also looks very impressive, even if you exclude the GM recall revenues:

Much of this growth has come due to growth off the lows in North American auto production, but even looking at it on that basis (at least in the last few quarters), the company appears to be winning content / taking share. This view is shared by one of the analysts who covers the company and does the following math to get to content gains recently:

We believe longs think they are paying 13x times forward earnings for a high performing auto parts manufacturer that may be able to compound earnings in the double digits for the foreseeable future. Although it is clear that the company is over earning to a degree even to longs, the business seems to be doing very well even including that, and that valuation doesn’t seem crazy.

It's also instructive to look at the shareholder base here, which consists predominantly of diversified long only mutual funds with hundreds of positions for whom their stake in Strattec is basically meaningless. It’s worth noting that the firm most concentrated in the name (GAMCO funds) has been selling shares pretty much every day since the last earnings release per amended 13Ds.

Further creating the opportunity, management holds no conference calls, is covered by two analysts that never receive calls on the company and thus spend minimal time on it. So all you have to go on are results and press releases, which don't provide a ton of color, and management, if you can get a hold of them, which has recently been pretty tough (with the stock’s recent run, the CFO seems reticent to take new investor calls). These guys are operators who focus on running the business and don't care much for hand holding people on models, which can make the business tough to project the business without substantial primary diligence.

Summary of our Variant View:

1). GM recall has contributed in excess of $2.00 to LTM earnings and closer to $2.35 of earnings on an LTM basis after next quarter. All of this is basically done as of October and should be fully out of numbers in C1 2015 / Q3 2014 (Company fiscal year is June 30).

2). We believe that 90% of STRT’s revenue growth from calendar year 2009 to 2013 can be explained by an increase in production at their large 3 customers off of historical production lows, not content gains within those or other suppliers. More recent growth is largely explained by strong underlying customer growth at Chrysler.

3). Nearly 2/3^rds of Strattec’s revenue is at risk of largely going away over the next decade due to emerging technological change that threatens to disintermediate them and/or make their core key / lockset products obsolete.

4). Underlying growth last quarter from Kia due to channel fill, is not recurring. This is nearly a third of the “underlying” revenue growth the company reported ex-GM revs in their latest quarter.

5). Growing parts of the business carry greater minority interest, which need to take this into account when projecting eps and valuation if using ebitda. We believe investors are substantially underestimating minority interest going forward. Also, GM recall work has no associated minority interest, making earnings bump bigger than it otherwise appears.

6). Arguably peak us auto production creates further optional it's if auto cycle turns

7) Private market value well below current stock price

Detailed Review of Variant View:

1. GM Recall massively contributing to earnings, one-time and going away in 2 quarters

In short, we believe 3 suppliers were involved in production of parts that contributed to ignition switch issues widely reported in the media – Delphi, Ortech, and Strattec. Although Delphi and to a degree Ortech have received the most press, Strattec was at the very least involved in production of parts post 2008 (when Ortech exited the business). Regardless, it’s widely accepted that GM – not suppliers – are at fault as the issue was in the design, which was created by GM. For a timeline of events, provides some helpful context, see http://money.cnn.com/infographic/pf/autos/gm-recall-timeline/

The most relevant piece for Strattec is the 2.6M cars recalled in March, on which they are involved in producing replacement keys and other components of the repair kits. To date, Strattec has recorded 39M of revenues from the recall. Given the severity of the PR issues surrounding the recall, there was an incredible sense of urgency for the parts to be produced as quickly as possible – as one can imagine, we believe this revenue was abnormally profitable for Strattec. This is generically true of most recalls, but we believe particularly true in this case given the relatively minor cost of the parts involved, and the tremendously negative PR associated. Strattec acknowledges as much in their most recent Q:

“The improvement in gross profit as a percentage of net sales in the current year quarter as compared to the prior year quarter was the result of increased sales of service parts related to a customer recall campaign, which typically have higher gross profit margins as compared to gross profit margins on parts sold for new vehicle production, and increased customer production volumes resulting in more favorable absorption of our fixed manufacturing costs”

We believe that the majority of parts for the recall were shipped at the end of September, with some excess in October that will show up in this quarter’s numbers but that production of parts is basically done. The company has communicated as much in our conversations with them, and this can also be confirmed by reading multiple statements from GM, including this one on their last conference all:

October 23^rd, 2014 GM Earnings call:

With respect specifically to the ignition switch recalls that we announced in the spring, our dealers have repaired more than 1.2 million vehicles, which is more than half of the population still on the road. We now have enough parts and kits available to repair all of the impacted vehicles, so we are stepping up our proactive outreach to customers who have not yet brought their vehicles in for a repair.

So how much has the GM recall contributed to results? Management discloses revenue from the recall campaign ($11M in Q4 and 28M in Q1), but that’s it. The hard part is determining how much incremental margin and cost is associated with the recall. We have tried to arrive at the answer a few different ways

1. From FY10 to LTM Q3 2014 (quarter before the recall), STRT revs grew 119M and gross profit grew 27M, implying incremental gross margins of 22.7%.

2. Gross Margins in FY12, FY13, and LTM FY14 up to the quarter before the recall were 18%, 18.1%, and 18.4% respectively. Given recent revenue growth ex-GM recall it’s probably fair to assume some continued march upwards, perhaps 20-40bps.

3. We also have received feedback from industry that aftermarket / parts GM are typically 1000-2000bps above regular OEM business. For recall work, it’s all over the map, but we know the company is earning higher margins on this business and discussions with the company suggest aftermarket like gross margins are a reasonable assumption, taking into account both the higher margin on the work itself and the resulting fixed cost absorption that also contributes to incremental margin.

4. Putting it all together, if we assume normalized gross margins for the business would have been 18.6% without the recall, we believe the company on an LTM basis has generated 13.6M of extra gross profit associated with the recall. We further assume that the company has incurred about 2.9M of excess SG&A associated with this work, resulting in incremental EBIT of 10.7M. This would be $2.00 of earnings on an LTM basis, with another $.35 or so expected to come next quarter from the final GM work booked in October.

2. Underlying customer production has driven most of growth over the last 4yrs

Strattec has been a beneficiary of the tremendous rebound in domestic US auto production, especially from the big three US manufacturers, Chrysler in particular. We believe the bulk of their revenue growth between calendar year 2009 and calendar year 2013 reflects this underling production growth rebound, not new content wins. In particular, we think the company has generally had flat content share at Chrysler (mostly keys & locksets for their entire product line and power doors for their two minivans), declining content share at GM (mostly keys & locksets), and increasing content share at Ford (keys, locksets, & misc work). Averaged together, content share has grown very modestly since 2009, and has basically been flat from 2010 to 2013. The problem with the math we presented from the analyst previously is that it does not adjust for mix-shift in the customer base – namely that Strattec has greater dollar content at Chrysler and Chrysler’s recent growth relative to other manufacturer’s makes it look like Strattec is growing dollar content, when really they are just benefiting from Chrysler’s growth. The main delta in dollar content is Strattec’ s near 100% market share of traditional key & lockset business at Chrysler, as well as work on the power sliding doors on Chrysler group minivans which carry much higher $ content per car than traditional key/lockset business.

Chrysler has driven most the recent growth at Strattec. Make no mistake, Chrysler is currently hitting it out of the park from a sales standpoint, and as long as this continues it will benefit Strattec to some degree. But digging deeper in the numbers, and looking over a longer- time horizon, Strattec’s content share has largely been flat at Chrysler. Chrysler’s dollar content on minivan’s is much higher than it is on traditional cars (the vast majority of the power access business serves the two minivans made by Chrysler). If we look ex-Minivan, Chrysler’s $ content/non-minivan is largely flat to down since 2010, despite the recent growth at Chrysler:

Source: Analysis, STRT Annual Reports, Chrysler, Oica.net- assumptions in red

Although it is possible that Chrysler continues to outperform and Strattec goes along for the ride, we think general secular issues and specific technological issues will eventually result in steady (and perhaps dramatic) content losses for Strattec at Chrysler.

3. Roughly 2/3rds of Strattec’s business is at risk of largely disappearing over the next decade

Putting the GM recall issue aside, we think more recently NA production gains, including substantial share gains experienced by Chrysler that have benefited Strattec, are obscuring substantial long-term issues. We believe the ~56% of revenues associated (64% adjusted for JVs) with Keys, Locksets, and Driver Controls are at risk of basically disappearing as new access technologies make these products obsolete. These segments make a combination of keys (w/ attached keyfob), locksets (lock that mechanical key goes into – including driver side door, glove box, ignition, etc.), and the ignition lock housing. Historically new access technologies have actually been a boon for Strattec – when Strattec worked on the first key fobs with Chrysler, Chrysler came to Strattec (who supplied 100% of their keys & locksets) and asked them to create a fob for their cars. Because Strattec historically did not have any electronics expertise (and still doesn’t really today), they partnered with a Japanese supplier to make the fob, and affixed keys with transponders to the fob itself. Historically, a full suite of keys & lockset for a car would be about $12-15 of value per car, about $2.50 for a pair of keys, about 2.00 for each locksets, and about $2.50 for the ignition locks. This all equated to roughly $12/$15 of content per car. With the introduction of the Fob, that 2.50 pair of keys became $9.00 – as the tier 1 supplier, Strattec earned a similar margin on greater dollar content – the change drove core dollar content to about $18-$21 per car. Over the years Strattec has supplemented this content with other types of content via JVs and acquisitions, as well as on the ignition lock ($6-8 per car) but this core $18-21 is still a large part of their revenues today.

New vehicle security & access technology is a game-changer and Strattec is looking as though they will be the odd man out here. Increasingly the fob is becoming the core way to access the vehicle, and the traditional mechanical lock & key is either going away or becoming largely a “back-up” to electronic access technology. If you have bought a new car recently (especially a higher end one), chances are the only mechanical key you have is a small blade hidden in the fob itself. You also probably only have one mechanical lockset (on the driver side door), as passive entry has replaced the need for it elsewhere. More technology and higher dollar value in the fob creates an opportunity for Strattec, in that it allows them to potentially be a tier 1 of greater dollar content in the car (as was the case when the key fob was introduced) and benefit proportionately. It also, however, creates two discreet risks that we think are more likely to play out over time: First, as electronic technology becomes a greater part of the solution, it increases the risk to Strattec that they become a tier 2 v. tier 1 supplier – e.g. they stop being the integrator of the fob into the key, and they just became a parts supplier to a tier 1 that integrates the the little metallic back-up blade into a broader solution. This means that the ~$8 of fob content Strattec currently gets goes away. It also introduces much greater competition to a market long dominated by a relatively small number of players – we believe companies like Continental, TRW, Bosch, Panasonic, Lear, and Kiekert are all using many of these new technologies to increasingly position themselves as tier 1s for the fobs, and then just sources the blade and lockset from Strattec as a tier 2. The second issue is perhaps the bigger one--many of these new technologies may make many of the parts Strattec provide obsolete, and already have on recently introduced luxury cars.

Push Start technology is a great example of how Strattec’s core business is at risk. We believe push start technology clearly eliminates a substantial portion of Strattecs dollar content – namely the ignition lockset (~$2.50 of content) and results in reduced cost for the steering column lock (e.g. makes a $8-9 part a $3-4 part). It also puts the core mechanical key and lockset at risk longer-term – as people become comfortable with keyless entry, it’s possible these disappear entirely.

Smart Keys are a second, perhaps scarier future trend for Strattec, and are made by many of the same companies that make push start – instead of using mechanical key with an RF transponder to verify the accuracy of the key, these keys don’t even have a mechanical element and just use an electronic chip for identification of the key. This eliminates the need for a mechanical key (except as emergency back-up), and eliminates the need for mechanical locksets. In conjunction with passive entry, where sensors on the door handle allow you to open car doors without needing to even take out your fob, it’s easy to see how the traditional key & lockset is at substantial risk.

Valeo recently introduced a new smart key in October at the Paris Motor Show which is not a key at all. It basically is a cell phone app that allows you to digitally send keys and to use your smart phone as a key. This is where most people think the future ultimately lies. The promotional video is worth watching:

https://www.youtube.com/watch?v=jx3VoK5ACYI

NXP, a 17B semiconductor company, is the leading provider of much of the chips used in emerging technology, lays out the issue for Strattec pretty clearly in their latest analyst presentation:

Although Strattec has some offerings in these areas, their offering is still predominately tied to older technology (classic keys). Strattec’s latest Annual Report and the accompanying pictures gives a good sense of where they are technologically , and is instructive in the context of how NXP talks about the market shifting– if you look at Strattec’s FOBs, nearly all have mechanical keys attached rather than smart keys. Strattec makes one reference to push start in each of the 2013 & 2014 annual reports (with the first reference occurring in 2013, years after push start technology was already becoming the norm in higher end cars). They make no reference to passive entry or smart keys (although they do make some passive entry fobs). These are the 3 fobs Strattec has pictured most prominently in their Annual Report:

Another perhaps more simple way of showing Strattec’s exposure to the traditional key & lockset is by flipping through their 2014 catalogue – page 50 to 63 has pictures of all the keys Strattec produces, and you’ll see pretty quickly what makes up the bulk of the products they carry:

http://s3.amazonaws.com/aftermarket-data/docs/historical-catalogs/2014+Strattec+Comprehensive+Catalog.pdf

It’s also instructive to look at the new products introduced for 2014. Although the company introduces some new FOBs for Ford and Lincoln (GM) (seven in all), the majority of products introduced look like this:

Dollar content on these largely “emergency” keys is much lower than on FOBS, and is supportive of our thesis that dollar content in keys & locksets should continue to decline. Strattec’s catalogue is also useful as you can use to it gauge content wins & losses to a degree by looking at what Strattec used to provide on certain cars and what they provide today. The 2015 catalogue shows some big losses on higher end cars (the typical pioneers of newer technology). For the 2015 model year, we believe Strattec lost the Escalade FOB (MSRP $73k), Suburban ($48k), Yukon ($47k), Tahoo ($45k) as those cars have transitioned to higher end FOB technology for the 2015 model year. To be fair, Strattec retained some FOB work on several Ford and other cars by supplying more advanced FOBs, but in general we see more risk from this transition than opportunity as at best Strattec is typically holding onto work they already have. Further, as Strattec is basically just is a contract manufacturer with these fobs (taking a printed circuit board and putting plastic around it) we think margins will ultimately be lower on this type of business.

Much of the technology discussed is either already emerging on higher end production cars or available in concept from competing suppliers. Several higher end car manufacturers, who typically pioneer technology several years ahead of more mainstream cars, have eschewed much of strattec’s core business altogether. Tesla is probably the best example of this - there are literally no locksets on the car. There is a very high end FOB with passive entry. When you get close to the car, a proximity reader recognizes the owner is close to the car and it extends the door handles. You open the door and enter. You press a button and you are off. Unlike other push button / passive entry cars that still have a mechanical blade and a couple mechanical locksets as back-ups, Tesla has eliminated his altogether. There is also no need for lock housing. If the future looks like this car from an access standpoint, Strattec is in trouble. Although this is possible, we think more likely what happens is that Strattec is reduced to a tier 2 supplier that offers a slim mechanical blade (see pictures above) and installs one back-up mechanical lockset on the passenger door. We estimate this would reduce Strattec’s likely revenue per car for keys & locksets by more than 75% compared to non-push start cars:

Ironically, the GM recall issue which has temporarily benefited Strattec may actually speed up its demise. Testifying before Congress in April 2014, GM’s CEO suggested that the ignition switch issue would not have been an issue with push start / smart keys been standard, and suggested that the this issue will likely speed up their plans to move entirely to these types of newer technologies.

4. Jump in Kia revenues due to channel fill

STRT saw revenues increase 14.6M in their latest quarter (Q1) ex-GM revenues. This implies underlying growth in the core business of 18.4%, which is still a very healthy number. Although we acknowledge that the company has more recently achieved some growth in excess of customer production, we think this growth is more modest that it appears. Kia/Hyundia is case in point, which contributed 5.3M of the 14.6M YoY revenue growth. Below is a snapshot of historical STRT Hyundia / Kia revs:

The company notes in their Q3 earnings release that the jump was due to “ramp up in production” on a new model of a vehicle for which they produce parts. Based on our field research and conversations with the company, we think the bulk of the increase was due to “channel fill” for the Kia Sonata, which is being produced in Korea. Because the parts of being shipped from Strattec’s facilities in the America, and since it can take weeks to get the parts to Korea, Kia ordered parts to “fill the channel” so they would have enough parts for launch. Although we expect revenues with Kia to grow modestly due to the introduction of the new Sonata (production is up about 40% from last year), we think 3M is closer to the right number. This channel fill was about 36% of Strattec’s ex-GM revenue growth in the quarter.

5. Growing parts of the business are JVs with substantial minority interest

STRT has two JVs that we believe account for about 37% of underlying revenues, a 51/49 JV with Adac for Door Handles & Exterior Trim, and an 80/20 JV with Vitte in their power access business. This means that over 10% of STRT’s revenues are attributable to minority interest. Historically, these businesses have been modestly more profitable than the core STRT business, such that minority interest has historically run between 15-30% of net income pre-equity income & minority interest. We believe that much of the new business Strattec has won is in their Adac JV, which carries the highest minority interest. In Q1, minority interest was up 60% YoY, and Net income from the Adac JV was up 130% YoY. More recently minority interest is only running about 10% (due to GM recall revs which are not subject to minority interest), and we think 20% and growing is a more likely number long-term. Partially offsetting this, the company has a 33% owned JV (VAST) and a 51% of JV (Next Lock) both recorded under the equity method. Next Lock is currently losing money and will likely lose money for the foreseeable future, largely offsetting equity income associated with vast. As such, we anticipate that net minority interest (minority interest – JV income) should run nearly 3M over the next couple years v. 1.7M last year, or an EPS headwind of nearly $.40. Further, we think minority interest adjustments need to be made when valuing on an EBITDA basis. We estimate that 10% of LTM EBITDA is actually attributable to minority interest (after adding in benefit from equity method JVs), making the stock appear nearly a turn cheaper on EBITDA than it actually is.

6. North American auto production, which drives the bulk of revenues for STRT, is near all-time highs – likely more downside than upside risk at these levels

Although not core to the thesis, it’s worth noting that North America production auto production levels are near all-time highs. They are 13% above the average production level since 1998, and 5% above the average production levels from 1998 to 2007 (before massive drop off experienced in recession). This also holds broadly true for US auto production as well. The rebound has been so impressive that the White House recently put together this hand graph, which broadly illustrates the trend.

The White House

There is also this one for total North American auto production.

Estimated production levels for 2014 including Canada and Mexico are 17.3M units, which would make this the third highest production year since 1990, and only 2% off all time highs. Although we have no strong perspective on when the cycle turns, this a cyclical industry and from a production standpoint we appear closer to the peak than the trough, making it tough to get hurt too much by increasing North American auto production and creating free optionality if the cycle turns.

7. Best comp was divested at a very low valuation, suggesting little/no takeout risk

In November 2012, one of Strattec’s best comps, Valeo’s Access Mechanisms business was sold to U-Shin. This business has a very similar business mix to Strattec, selling “keys, locksets, steering column locks, handles and latches”. Based on conversations with Valeo, our understanding is they sold the business because they viewed it as a poor business with challenged growth prospects due to secular challenges in keys & locksets. The price they received is instructive. After the shopping the assets for several months, they sold the business for an EV of 223M euros, compared to sales of 620M, or an EV/Rev multiple of .36x, v. STRT trading at about .8x ex-GM recall revenues. The divested entity had operating profits of 28M, meaning it was sold for 8x EBIT. At similar valuations, ex-GM recall biz, Strattec would trade at $40 and $60 respectively.

Valuation – Putting it all together:

Although we typically value businesses on a EBITDA basis, given the capital intensive nature of the auto parts industry and the minority interest in the business that is hard to model on an EBITDA basis, we value the business on EPS.

Giving the company for continued strong north American auto production (to levels never before achieved), including continued strong growth at Chrysler, we think the company can do $5.00 of earnings next year. At a peer multiple of 12x our generous $5.00 EPS number, Strattec would be a $60 stock. Given the real secular challenges to the bulk of the business, as well as other issues discussed. In Fiscal year 2013, with north American production at healthy levels, the business did about $3.41 in EPS ex-items. At 12x this number, Strattec would be a $40 stock (not far off from where it was earlier in 2014). Ultimately, if the secular issues play out more fully here and/or north American auto production declines materially, we think it’s possible for the stock to go even lower. If the company outperforms our estimates for growth and margin expansion, we see $6 possible in 2015. At a generous multiple of 18x (where higher margin auto supplier peers trade) this would be a $108 stock.

Key Risks:

1. Strattec uses historical relationships with OEMs to maintain its position as a tier 1 supplier. Rather than becoming a tier 2, they maintain their tier 1 status and become a beneficiary of greater dollar content in the solutions they provide to OEMs. They keep the FOB work and the FOB value increases enough to offset losses from the ignition lockset & in the ignition lock housing going away over time.

2. Strattec has exposure to several areas which do not have secular issues, where they seem to be doing pretty well –namely latches & door handles /trim (through their JV with Adac). These two business combined are less than 20% of FY14 revenues, but they have grown nicely, and the $ content per piece is health (in some cases bigger than the traditional key & lockset business). It is possible that growth in these areas helps to offset weakness is keys and locksets, and can even outpace it. While this is a possibility, we believe this scenario is largely priced into the stock at current levels

3. Strattec has a small JV investment in Nextlock & a larger one in VAST (captured in their equity interest line). Neither of these businesses are meaningfully profitable and we see no prospects of that changing materially, but admittedly these are units we have not focused as much time on.

4. Chrysler is Strattec’s largest customer and recently has been performing exceptionally well, with US sales growing in the mid-high teens and increasing traction internationally. To the degree Chrysler continues to grow rapidly, and to the degree Strattec maintains its strong position with Chrysler, this could offset some of the shortfall we are expecting.

5. Future recalls on other ignition switches in other GM, Ford, or Chrysler cars could serve to give further one-time bumps to the business. Because Strattec’s business is relatively small, and recalls can be pretty large and over a short duration, recall work can have a meaningful impact on the business. Although most of these issues should now have surfaced, there have been many other recalls announced by other companies, and it is unclear to what degree Strattec has any involvement or may in the future have any involvement in future recalls.

6. Lower gas prices may provide a further boost to trucks / SUVs that Strattec has greater exposure to. This short term bump may help to offset some weakness from losing GM revs.

Catalyst

1)  End of GM recall revenue and margins returning to historical levels

2)  Content / Program losses as technolog drives share losses in core business

3)  EPS Miss / Revision starting in back half of hte year due to above issues