Fitch Ratings has raised the long-term credit ratings of TRW Automotive Holdings Corp. (TRW) to ‘BB’, up two notches from ‘B+’. The upgrade was based on the rating agency’s faith in the company’s efforts to reduce debt through aggressive restructuring actions.
However, the upgraded rating still retains the company’s stock within the non-investment category, a junk status. All that the new rating adds it to imply that the company is well positioned to benefit from a rebound in demand for automobiles.
TRW has managed to mitigate the impact of the industry downturn through cost-cutting measures, including headcount reductions and plant closures. Overall, cost cutting has meant savings of nearly $400 million annually.
Since the beginning of the layoffs in 2008, approximately 3,000 salaried positions have been eliminated, of which 1,600 happened in 2009 alone. The company has also announced plans to close its Mount Vernon facility in North America and the Mere Green electronics plant in the U.K. by the end of 2010.
In the first quarter of the year, TRW reported a profit of $209 million or $1.65 per share in a marked contrast to a loss of $115 million or $1.14 per share in the prior-year period. The profit was significantly higher than the Zacks Consensus Estimate of a profit of 72 cents per share.
The improvement in profits was caused by higher sales due to an increase in automotive production, TRW’s lower cost structure and favorable movements in currency exchange rates. Sales in the quarter shot up 50% to $3.6 billion.
TRW had a long-term debt of $2.2 billion as of April 2, 2010, reflecting a debt-to-capitalization ratio of 62%. The company’s net cash flow from operating activities improved to $21 million in the quarter from an outflow of $254 million in the previous year. This was attributable to a higher income, partially offset by increased working capital requirements.
TRW anticipates sales in the range of $12.9 billion–$13.3 billion for the full year 2010 and $3.4 billion for the second quarter of the year. The expectations were based on the assumptions for industry production volumes of 11.5 million units in North America and 16.7 million units in Europe.
Since earnings were released, two out of seven analysts covering the stock have raised the EPS estimates for 2010 upward, while only one revised downward. For 2011, there were two upward revisions of estimates as well and no downward revisions.
In absolute terms, the analysts have raised the EPS estimates by $1.59 to $3.86 for 2010 after the earnings announcement. For 2011, the estimates have been increased by $1.33 to $4.35 per share.
The strong upward revisions of the estimates along with a recovery in the industry and the company’s effective restructuring actions have led us to recommend the stock as “Strong Buy” (Zacks Rank#1) in short-term and “Outperform” in long-term.
Read the full analyst report on “TRW”
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