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Another Interesting Post-Bankruptcy Play: Visteon Corp.



June 16, 2011 – Comments (0) | RELATED TICKERS: VC

Here's another idea from this week's Barron's Roundtable. this one was offered by Archie MacAllaster.  His suggestions in the last Roundtable issue didn't exactly light the world on fire, but I find this one interesting nonetheless. He recommends buying Visteon Corp. (VC). This is another stock that I have been long for quite some time in CAPS. I actually owned it when it was still trading on the pink sheets. Here's what I had to say about Visteon back in September:

One Million Quick Pitches

I came across an interesting write-up on the Visteon, the old Ford parts subsidiary, the other day over on the great AAOI site and requested to have it added to the CAPS system. VSTNQ.PK is up over 18% today...of course only 8.9% of that came after my CAPS pick went live :).

Here's the great write-up on Visteon that I mentioned:

Investment Analysis: The Visteon Corporation (VSTNQ)

As a little background, Visteon was an absolute mess when Ford spun the division off many moons ago. The transaction was actually a great lesson in how all spin-offs are not created equally. It was loaded up with debt and headed down the river in a barrel towards the "Great Recession" waterfall that caused much pain in the auto sector.

Today, as with any company emerging from bankruptcy, Visteon has much less debt today. Its customer list is fairly attractive as well, with 65% of its business going to Ford, Hyundai/Kia, and Nissan/Renault.

For me to purchase this stock in real-life I will have to overcome a number of past ideas that I have about the company. Once I get it in my head that something stinks, it takes a lot to change my mind, but Visteon does look very attractive at this price level with its new structure.

Certainly one would think that Visteon will receive a nice pop once it becomes listed as a normal stock on a major exchange. That in itself might be enough of a catalyst to take a flyer on it right now. That's why I added it in CAPS.

I'm not tremendously bullish on the North American market for light vehicles right now, but Asia should fair somewhat better and the new Visteon derives a ton of business from there.

The thing that I like the best about Visteon is the quality of its major clients. Ford and Hyundai have performed very well over the past several years, relatively speaking. They are two of the better-run automakers out there.

Here's what Mr. MacAllaster had to say about the stock in Barron's:

What are you doing?

We've been buying Visteon [VC]. It sells for about 60. The 12-month range is 76.72 to 49. Visteon is an auto-parts company that formerly was owned by Ford Motor [F]. Visteon exited bankruptcy court last fall. Its first-quarter earnings were better than expected. The company earned about 87 cents a share, while people were expecting 79 cents. It could earn about $4 a share this year and as much as $7 next year. The business is a lot different than it used to be.

How so?

Only 21% of sales are in the Americas. Another 39% are in Europe, and 40% are in Asia. More than 50% of sales are to Ford and Hyundai Motor [005380.Korea]. The company has net cash. U.S. auto sales were down slightly in May. Ford's sales were flat but Hyundai's were up 20.7%. Visteon is a great way to play the worldwide recovery in auto sales. The stock could be 80 by December 2012.

Visteon owns 70% of Halla Climate Control [018880.South Korea], a South Korean company. It has a 50/50 joint venture in China with Yanfeng. Analysts think this investment is worth $25 or $26 per Visteon share. Yanfeng sales in China were up 37% year over year in the first quarter, to $720 million.

I should have sold Visteon when it re-listed on the NYSE. I was right, its stock soared. I'm still up 20% on it in CAPS and its stock has dropped 20% since it reappeared on the Big Board. I love that this is a post-bankruptcy play. I'm not in a hurry to add shares of Visteon though because I suspect that we may end up seeing some weakness in auto sales and production numbers over the next several months as a result of the Japanese quake. This wouldn't directly impact VC's operations, but it might impact the demand for its parts and/or the perception of the auto sector recovery.

Here's another bullish Visteon article, this one from Bloomberg.  In this piece the author contends that Visteon's investments in Chinese companies are so valuable at this point that investors are getting the company's U.S. operations absolutely for free.

Some money manager named Westwood Holdings Group Inc. did a sum-of-the-parts valuation on Visteon and it belives that the company is worth $90 a share, 45% higher than yesterday's closing price.  Of course I'm sure that they own stock in the company so one has to take this with a grain of salt.

One thing that I like about Visteon is that it has the worst margins in the auto supplier sector.  What you say, how is that a good thing?  Well, I'll tell you.  Incredibly run companies with awesome margins are usually very expensive and have very little ability to improve their best-in-class profit margins.  On the other hand, poorly run companies with bad margins are usually Visteon is right now.  Furthermore, they have the ability to improve their terrible margins and watch their profits, and in turn share price soar.

The company now has an opportunity to improve its margins as the auto sector continues its recovery (following a minor setback by the Japanese quake), possibly monetize its investments in foreign companies, and it has a clean balance sheet (it actually has more net cash than any U.S. supplier other than Lear) following its emergence from bankruptcy.

Visteon in China Means Earnings Are Free in Auto-Parts Takeover: Real M&A


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