Faurecia EO
February 04, 2011 - 1:31pm EST by
2011 2012
Price: 25.25 EPS $1.48 $3.03
Shares Out. (in M): 110 P/E 14.0x 9.5x
Market Cap (in $M): 3,783 P/FCF 13.0x 9.0x
Net Debt (in $M): 1,225 EBIT 595 750
TEV ($): 5,008 TEV/EBIT 8.4x 6.6x

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Faurecia (EO FP) is a typical self-help value position, where the market is failing to appreciate that recent and ongoing restructuring will allow the company to generate mid-cycle earnings well above their historical average.

Faurecia is a €3.0bn, Paris-listed automotive supplier. The company is the sixth largest global automotive supplier with market leadership in 3 of its 4 divisions: exhausts, bumpers and dashboards. In seating, it is number 3 in a highly consolidated market. We believe the company will continue to outgrow the market for a number of years owing to a highly favourable customer exposure. German auto manufacturers are growing faster than peers with their successful expansion into emerging markets and account for 37% of Faurecia's sales. At the same time, Ford will grow to become Faurecia's #2 customer following share-gaining contract wins in previous years turning into sales. Ford currently accounts for 13% of sales but will overtake Peugeot's 19% of sales in 2012.

The company has averaged only 0.3% margin for the last 4 years but following dramatic restructuring in 2009 and 2010 (please see detailed investor presentations on company website, which we have validated with management), we believe the company will be able to sustain a mid-cycle margin >5%. Factories have been closed and much capacity has moved offshore. The breakeven point has been reduced by 18%, the fixed cost ratio expected to drop from c.21% in 2009 to 16-17% of sales while the gross margin is set to improve continuously over the next four years as higher margin contracts enter the sales mix. As a result ROCE will expand from well below WACC to the 20-30% range. With growth assumptions close to consensus global automotive production forecasts, Faurecia is in a position to deliver nearly 20% EBIT growth CAGR 2011-2014, with earnings up over 25% per annum.

Despite analyst EBIT forecasts rising nearly 200% during 2010, the stock has de-rated and the market remains sceptical of the company's ability to perform. The stock is trading on an underlying PE <7x 2012e with a free cash flow yield of c.15% rising to >20% by 2014. At the same time, the EV/Sales metric appears to be pricing in a mid-cycle margin <3% vs. our target >5%.

The company has been below many radar screens owing to a low free float as Peugeot still owns 57% and the company (Faurecia spun out of Peugeot in 1987). As recently as 2009, the stock often traded <€150k worth per day but the current liquidity following two rights issues gives a recent average around €8m per day. Peugeot is likely to continue to dilute their stake and an ADR program scheduled for 2011 should provide further catalysts.

Our Dec-11 PT of E40 offers 60% upside and would put the company on forward multiples of 8x EV/EBIT,11x PE and still only 3.5x EV/S implying a mid-cycle margin of c.3.5%.


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