(TRW) TRW Automotive Holdings Remains Neutral

We reiterate our Neutral recommendation on TRW Automotive Holdings Corp. (TRW), which is a leading manufacturer of advanced technology products and services for the automotive markets. The company is one of the world’s largest suppliers of automotive systems, modules and components to global automotive manufacturers.

Headquartered in Michigan, U.S., TRW Automotive operates in 26 countries through its subsidiaries. These operations primarily involve the design, manufacture and sale of active and passive safety related products.

The company released its 2011 first quarter results on May 04, 2011. The company reported a net income of $292 million or $2.21 per share, up almost 40% year over year from $209 million or $1.65 per share in the year-ago period. Total revenues improved 15% to $4.11 billion driven by higher global vehicle production volumes and rising demand for TRW’s active and passive safety products.

The company is expected to witness significant improvement going forward given its long-term prospects and accretive strategies.

TRW Automotive is globally recognized as one of the largest and most diversified suppliers of automotive systems, modules and components to OEMs and related aftermarkets. In addition, the company continuously seeks to upgrade and improve its vast product portfolio, which is capable of generating top- and bottom-line growth even amidst soft automotive environment. This differentiates the company from many of its peers.

Moreover, the company has seen substantial improvements in its Electric Power Steering (EPS) systems business both domestically and internationally, driven by increased demand for fuel-saving and emission reducing technology.

As a result, TRW has started EPS production from its facilities in Anting, China to support its growing business in the Asia Pacific region. Moreover, TRW Automotive also intends to expand  its Nove Mesto nad Vahom plant to support the introduction of EPS sensors and EPS Belt Drive steering systems.

However, high raw material prices, notably steel, have raised the cost of production for the company, thereby affecting its gross margin. Also, steel prices are expected to increase by $25-$30 per ton worldwide within the next couple of months, further raising the cost of production. This may restrict the company’s desired margin expansion plans.

Moreover, another important drawback of TRW Automotive is its high customer concentration. Ford Motor Co. (F), General Motors Company (GM) and Volkswagen AG (VLKAY) account for over 46% of the company’s sales. The loss of any one of these customers or major production cutbacks could significantly impact operations.

Thus, the shares of TRW Automotive are maintaining a Zacks #3 Rank, which translates into a short-term Hold rating.

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