If you haven’t heard of TRW Automotive Holdings, that doesn’t mean you can’t profit from its moves. TRW supplies automotive systems – including breaking, steering, airbags and seat belts – to auto manufacturers. Year-to-date, as the automotive sector has been hot, the stock has risen 34 percent as of Tuesday’s $71.90 closing price. This sits near its 52-week high of $74.
Technically, the stock is still showing strong signs. TRW is trading above the 50-day moving average ($69.31) and 200-day moving average ($61.83). The stock is also trading above the 52-weeks moving average, and is showing momentum for the upward trend. Each pullback is accompanied by higher lows and higher highs, which shows continuous consistent demand or expectation of the stock.
FUNDAMENTALS ALSO BULLISH
TRW’s short-term bullish technical indicators are supported by strong fundamentals, as well. In Q2 2013, TRW reported sales of $4.5 billion, an increase of $275 million compared to the same period a year ago. Sales were benefited by foreign exchange to the tune of $36 million during the quarter, as the euro to dollar exchange rate averaged $1.31 this quarter compared to $1.28 last year. At the bottom line, GAAP net earnings of $1.99 per diluted share compared with $1.71 in the prior year. Excluding the special items, earnings were $2.02 this year, 17 percent higher than last year’s second quarter earnings of $1.72
TRW is also taking advantage of new markets. China (17.3 percent of annual sales) has improved the company’s outlook, with a $280 million increase in its sales compared to last year. At the same time, the North American market (36 percent of annual sales) is showing signs of improvements for the second half of the year.
Despite a gloomy forecast for the European market, TRW continues to focus on researching new technology, including short-range radar, camera based products and other advanced power train that tackle the problem introduced by new environmental regulations that require cleaner power system in the future.
According to the management’s latest estimate, annual sales are forecasted to be in the range of $16.8 billion to $17 billion. With the current margin of 8.6 percent and the outstanding shares (after taking into considerations of the 2nd offerings), the 2013 estimated EPS would be approximately $10 per share.
TRW IS A BUY
That should serve as a baseline as any rebound in the European economy – or acceleration here in the U.S. – would improve the forecast. As such and despite its outperformance, TRW is a buy for traders at current levels.
As I prefer options strategies, I would recommend taking a look at buying the October 2013 $70 calls, while simultaneously selling the $75 calls for a net debit of $2.40. As long as the price trades above $72.40 by the October strike, you will make a profit. Your maximum loss on this would be that net debit ($2.40), while the max profit is $2.60.
