Description

For those of you who can dabble in European small/mid-caps, I believe Stabilus S.A. offers a very interesting entry point. The pitch is short – it’s a relatively simple and unsexy idea.

Stabilus is the leading manufacturer of gas springs, dampers, vibration isolation products as well as electromechanical tailgate opening systems, which are primarily used in automotive, and to a lesser extent industrial application. Typically, the products are used to aid the lifting, lowering or dampening of movements (such as tailgates, doors, etc.).  Stabilus manufactures for all key vehicle producers.

The company is the leading producer of gas springs with very high market share.  Depending on the exact product, the share of the global market ranges from 20% to 80% for its key products.  The company has a global presence, however, the majority of its sales are focused in Europe and North America as below. 

The stock is down 54% since July 2018, primarily due to three factors:

1. Reduced sales growth

2. Concern of recession and impact to auto sector

3. Concern re: impact of slowing Asian economy, which was previously perceived as the region with the highest growth opportunity.

While some or all of these may be true, my perspective is that these are largely priced into the stock at this point and offers a compelling value opportunity.

One may ask, where is the moat?  It appears to be a fairly simple business.  The key elements of the company’s competitive advantage are as follows:

• Cost structure: Stabilus has the lowest unit production costs in the industry, driven by technology and an engineering team that is constantly pushing for efficiency.  This may seem like a simple point but their production is almost completely automated with manufacturing equipment that has been designed by in-house engineers, specifically for gas spring production.  Perhaps this can be replicated with time but unlikely at a meaningfully lower per-unit production cost.

• Quality: Stabilus’ products are seen as the highest quality and most reliable in the market.  When considering the very small incremental cost of gas springs in automobile manufacturing, OEM’s choose the best product rather than choose to save a few pennies.

Why does the stock represent value now?  LTM levered free cash flow generation was approximately EUR 100m, which accounts for the weakening of revenue in the last 2 quarters (EUR 110m free cash flow as of fiscal year-end Sept 2018).  Given the current market cap of EUR 950m, this is a FCF yield of approx. 10.5%. On an earnings basis, the company trades at approx. 10x LTM earnings. Since 2015 the company has generated a ROE of 22-28%.

Leverage is moderate with net debt totaling EUR 185m (EUR 320m debt and 135m cash), resulting in net debt /EBITDA (LTM) of 1.1x. This is very reasonable and poses little risk to the company. 

I believe there is little risk that one sees meaningful further downside given the competitive advantages and market share of the business, combined with the attractive cash generation and valuation levels.  In the case that the Asian market improves and concern of an immediate recession subside, I think there is a high probability Stabilus will recover quickly. 

Catalyst

• Revenue stabilization
• Recovery in Asian market