New Roland Berger Study: Possible Recovery in the US Supplier Industry -- but Companies Are Still Undervalued

DETROIT, MI and CHICAGO, IL--(Marketwire - Oct 30, 2012) -

• Roland Berger Strategy Consultants analyzes the pulse of the US automotive supplier industry
• US automotive suppliers have shown an impressive recovery from the crisis: record profits and revenue increases; outperforming European and Japanese peers
• In spite of the recovery, US suppliers remain undervalued: USD 23 billion in market capitalization has been destroyed in the last 20 months
• Political and economic volatility in major automotive markets, growing influence of emerging market players and rapid innovation are resulting in supplier diversification
• Transparency, communication and stock separation are potential ways to improve valuation and unlock value

Roland Berger Strategy Consultants has released a new study that captures the pulse of the US automotive supplier industry. The study provides an analysis of the current health and performance of US suppliers relative to the global industry and focuses on one of the most relevant issues facing US suppliers: undervaluation despite record profits and healthy balance sheets.

After going through a rough patch where US light vehicle sales dropped 35% in 2 years, recovery has been steady and much faster than expected at the beginning of 2012. The current seasonally adjusted annual rate (SAAR) forecast is expecting 14.9 million light vehicles to be sold in 2012. US suppliers have benefited, with revenues up 42% since 2005 and EBIT margins improving to record levels. "Balance sheets are stronger than ever and are in better shape than their European, Japanese and Chinese counterparts," says Thomas F. Wendt, Partner with Roland Berger Strategy Consultants. "However, this has not translated into market returns."

Even with record profits, the Roland Berger US Supplier Index has lost 9% in market capitalization in the last 20 months, while the S&P 500 has gained 13%. This has resulted in over USD 23 billion in lost market capitalization. Neither beating EPS consensus nor strategic acquisitions seem to have improved their stock performance.

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. Sales will continue to drop in many key regions, making the entire market extremely fragile," explains Thomas F. Wendt.

Economic instability in major markets will add to this volatile situation. After the uncertain situation in Europe and the slowdown in China, the industry's growth engine, we are now facing the risk of a double dip in the US. In addition, many investors still have the recent crisis in mind and are therefore extremely cautious when signs of a potential new contraction arise.

Fundamental changes in the industry: increasing complexity and uncertainty
Megatrends impacting and changing the industry are becoming a reality -- and those changes are happening faster than we might 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," says Roland Berger's automotive expert Wendt. "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 M&A activity, which is contributing to the pressure on US suppliers. Since 2005, emerging market OEMs have gone from 3 to 6 spots on the list of the top 10 largest CV manufacturers. Most of these companies also manufacture LVs, where a similar change can be expected. As a result, emerging market suppliers' global market share has almost tripled in the last decade -- whereas that of US suppliers has nearly halved.

Ongoing diversification, fueling analyst ambiguity
Changes in customers, competitors and increased innovation are driving complexity for suppliers. As a result, they are becoming increasingly diversified through moves into new markets and products -- which subsequently contributes to ambiguous valuations.

A sum-of-the-parts valuation in the study demonstrates that diversified suppliers are heavily discounted as an enterprise because of a perceived lack of focus and analyst peer group confusion. Diversified suppliers also had a significantly wider range of analyst EV/EBITDA multiples than pure play suppliers, which can contribute to lower valuations.

How to unlock value
"The keys to unlocking value are transparency and communication, which can help analysts distinguish between business unit strategies and competitors," says Thomas F. Wendt. "Additionally, strategic moves such as stock separation through split-offs can increase the combined valuation while further focusing the individual units."

The study outlines a few levers which could potentially improve valuation. However, volatile global markets do not just affect valuation -- they also threaten financial performance in the foreseeable future. These levers must be used in conjunction with a focused strategy and a portfolio that keeps up with the megatrends transforming the automotive industry.

The study can be downloaded free of charge at:
http://www.rolandberger.us/expertise

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Roland Berger Strategy Consultants, founded in 1967, is one of the world's leading strategy consultancies. With 2,700 employees working in 51 offices in 36 countries worldwide, we have successful operations in all major international markets. The strategy consultancy is an independent partnership exclusively owned by about 240 Partners.