The numbers look good, but all is not rosy for suppliers.
Though shareholder value rose 8.3 percent in the second quarter for the supply group on the Automotive News/PricewaterhouseCoopers Total Shareholder Return Index, those parts makers are fighting back from historical lows reached late last year, when production slowed drastically and investors feared recession.
But sales didn't fall as much as predicted, production steadied and a series of interest rate cuts buoyed economic prospects.
When many suppliers adjusted to the changing climate with job cuts and cost reductions, Wall Street rewarded them.
'There are fewer question marks out there, compared to the end of last year and the early part of this year,' said Jay Singer, a manager at PricewaterhouseCoopers in Detroit.
The favorable turnaround is all relative, though. For example, the tech stock decline helped push investment into manufacturing companies with more reliable cash flow.
Most of the top suppliers still have a long way to go before regaining the highs of 1998. They struggle with high debt levels, customer pressures to cut prices and absorb more costs, excess capacity and marginal businesses that aretough to shed in the current market. Further declines in production volumes also loom.
The market already has accounted for those challenges, one analyst said.
'We think a lot of that is reflected in the stock prices,' Robert W. Baird analyst David Leiker said. 'To us, that's a known issue, and it's the incremental change that's more important.'
Supplier woes have been well reflected on the index. The group posted an average decline of 20.4 percent for the past 12 months and a 38.2 percent decline for the past three years, well behind market benchmarks and the struggling automaker sector. Only the retail group performed worse during the three-year period, with a decline of 44.2 percent.
Bottom-dwellers post gains
The suppliers that made the biggest strides during the second quarter were perennial bottom-dwellers such as Intermet Corp. and Dura Automotive Systems - companies that remain low on the three-year list, with respective declines of 67 percent and 50.2 percent. Their gains were linked largely to cost-cutting efforts that may position the companies to improve earnings in the long run.
Intermet, which jumped 107.2 percent in the second quarter, initiated plant closings and job cuts earlier this year and is working to extend a $200 million loan. It even met second-quarter profit forecasts, but those earnings still were well below year-ago levels. Company executives say the uncertainty of the third quarter, with its annual plant shutdowns, likely will push sales below the current Wall Street consensus.
'People are more comfortable today that they're not going out of business than they were in the first quarter,' said Brett Hoselton, an analyst at McDonald Investments.
Dura rose by more than 89 percent as it cut expenses and reported first-quarter earnings 50 percent greater than analysts' consensus. Even so, revenues were down and gross margin shrank. Lear Corp., Visteon Corp. and Dura led the one-year results.
Over three years, Asian suppliers Stanley Electric, Aisin Seiki and Showa continue to outperform North American companies. Stanley doubled operating profits for the year that ended March 31 and said profits should continue to rise. It plans additional expansion and a stock buyback.
Shutdowns may be extended
Down the road, consolidation of the supply base will continue, especially as increasingly troubled parts makers get out of the business, said Mike Burwell, a PricewaterhouseCoopers partner.
Many companies have businesses up for sale already, from conglomerates looking to lessen their dependence on the low-margin auto business to industry giants, such as Delphi and Visteon, attempting to pare underperforming product lines. But all face a tough acquisition environment in which stock currency is low and debt already is high.
In the near term, summer shutdowns may extend beyond their usual lengths if customers need to adjust for lower sales volume, hurting the entire supply base, Burwell said. He forecasts North American production to drop 7.1 percent to 16 million in 2001 and then to 15.7 million in 2002.
Those production numbers are subject to further swings in the economy. The biggest risk is a recession in the second half of 2001 or in 2002.
Though some market watchers say recent indicators make such a turn unlikely, others warn that a more severe decline could happen, especially if unemployment continues to rise and consumer spending deteriorates.
Though recent sales were better than expected, that improvement is tenuous. Incentives remain high, and June sales, for instance, were inflated artificially by an extra day and by actions such as a General Motors' incentive to get customers to trade leases in early, analyst Hoselton said.
U.S. suppliers with a heavy reliance on Big 3 customers also will suffer as market share continues to shift to import makes. Suppliers to Ford Motor Co. also have been hurt by production shutdowns related to the Firestone tire recall.
Said Hoselton: 'We may be at the peak of a slight rebound here. You're probably going to have a couple of more good months, but I think there's plenty of evidence out there that the sales environment is weakening.'