Industry has lost $23-billion in market capitalization over last 20 months despite record profits
DETROIT and CHICAGO—American automotive suppliers have shown an impressive recovery from economic crisis but remain undervalued, according to a new study.
According to a Roland Berger Strategy Consultants study, the U.S. industry has lost $23-billion in market capitalization over the last 20 months despite record profits and revenue increases post-recession.
After going through a rough patch where U.S. light vehicle sales dropped 35 per cent in two years, recovery has been steady and much faster than expected at the beginning of 2012, according to Roland Berger.
The current seasonally adjusted annual rate (SAAR) forecast is expecting 14.9-million light vehicles to be sold in 2012.
U.S. suppliers have benefited from the projected sales numbers, according to the firm, with revenues up 42 per cent since 2005 and earnings before net interest and tax (EBIT) margins improving to record levels.
“Balance sheets are stronger than ever and are in better shape than their European, Japanese and Chinese counterparts,” Roland Berger partner Thomas Wendt said in a statement. “However, this has not translated into market returns.”
Even with record profits, the Roland Berger U.S. Supplier Index has lost nine per cent in market capitalization in the last 20 months, while the Standard & Poor’s (S&P) 500 has gained 13 per cent.
Volatile market outlook with crisis still in mind
“We believe that the global automotive market will not collapse, but that the coming 12 months will be difficult,” Wendt said. “Sales will continue to drop in many key regions, making the entire market extremely fragile.”
Economic instability in major markets will add to this volatile situation, the firm cautioned.
Fundamental changes in industry
Megatrends impacting and changing the industry are becoming a reality, according to Roland Berger, and those changes are happening faster than some may think.
“This development is leading to a lot of complexity and uncertainty regarding which technologies will dominate the market and where the industry is heading,” Wendt continued. “Additionally, faster innovation, bringing new players into the market and changes in the next generation’s transportation preferences are adversely affecting the outlook for traditional automotive companies.”
Emerging market players are also rapidly gaining influence through organic growth and an increased rate of merger and acquisition activity, the firm said, which is contributing to the pressure on U.S. suppliers.
Since 2005, emerging market original equipment manufacturers (OEMs) have gone from three spots to six on the list of the top 10 largest CV manufacturers, according to Roland Berger.
Ongoing diversification fueling analyst ambiguity
Changes in customers, competitors and increased innovation are driving complexity for suppliers, according to the firm, and they are becoming increasingly diversified through moves into new markets and products as a result.
How to unlock value
“The keys to unlocking value are transparency and communication, which can help analysts distinguish between business unit strategies and competitors,” Wendt said. “Additionally, strategic moves such as stock separation through split-offs can increase the combined valuation while further focusing the individual units.”