Wescast Industries WCS-A.TO
March 10, 2008 - 1:14pm EST by
joe661
2008 2009
Price: 7.94 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 105 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 0 TEV/EBIT

Sign up for free guest access to view investment idea with a 45 days delay.

 

Description

Wescast(WCS-A.TO) is a Canadian auto-parts supplier. They are the world's leading manufacturer of exhaust manifolds.  Like almost every other auto-parts supplier they have had a rough past few years.  This is what their business looked like from 97-06:
 
 
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
 
 
 
 
 
 
 
 
 
 
 
shares
13.1
13.1
13.2
12.9
13
13.08
13.1
13.1
13.1
13.1
book/sh
14.73
18.17
22.50
26.43
29.23
32.41
32.67
30.99
27.02
28.17
eps
3.07
3.62
4.58
5.03
5.01
4.71
4.16
2.58
-1.66
0.37
sales/sh
16.95
21.22
26.44
30.78
29.46
32.34
33.13
31.22
29.16
28.32
ROE
24%
23%
23%
21%
18%
15%
13%
8%
-6%
1%
 
For 07, sales were up about 5% to $386.5mm, operating income was $4.6mm.  There are 13.1mm shares out, at $8 the market cap is $105mm CDN.  The balance sheet is very solid, $444mm in tangible assets and only $97mm in total liabilities.  Also, they have $16.4mm in cash and $5.7mm in debt. 
 
So you are paying about 30% of book value and about 27% of sales for an auto parts supplier with a very conservative balance sheet, and that was a very good business up until around 2003.  I can’t give you a catalyst that is going to return them to 20% ROEs again(if they were out there the stock wouldn’t be at $8), but there are some positives.
 
First is valuation.  Stocks at 30% of tangible book almost always have a lot of debt, are running big losses, and generally have a decent shot at going bankrupt.  Wescast has a very conservative balance sheet and had an operating profit in 07.  You could look at a US-based company like SUP whose past financials look very similar to Wescast and has a similarly strong balance sheet, but SUP is trading at 90% of book and about half of sales.
 
Second is their European expansion and diversification away from the Big 3.  Wescast has 50% share in North America, and 66% of market share among the Big 3(which explains their recent problems), but international revenues are growing to be a significant part of the pie.  In 07 sales in Europe were $103mm, up 25% YoY and up 5-fold since 2003, and now comprise over a quarter of their total revenues.  They now have approximately 15% share in the European market and growing, with a client list that includes Volkswagen, Puegeot, Renault, Audi, and BMW.
 
Third is their China expansion.  Wescast has invested $30mm in a Chinese foundry and machining operation that is now substantially complete but has yet to contribute any revenues.  Limited production has started in the first quarter of 08 and will ramp up through the year. 
 
One thing to note is their decline in profitability is not solely due to declining North American volumes, input costs have been surging, most important to Wescast are scrap steel and moly.  If input prices subside or they can eventually pass through their costs than the profit picture can improve even if Big 3 volumes don’t improve. 
 
So that’s about it.  It’s a pretty boring Graham-type stock and doesn’t have any catalysts other than good things possibly happening in Europe and China.  But you have a company with a very conservative balance sheet trading at 30% of book, business has been bad starting in 03, but in the meantime they have expanded internationally and improved their position overall.  I think it’s tough to really lose money at this kind of valuation with this kind of company, there is good upside if it just returns to a more reasonable valuation, and there is a ton of upside if Europe and China work out well, if input prices subside, if big 3 volumes pick up, etc. 

Catalyst

valuation
    show   sort by    
      Back to top