Auto suppliers continue to feel automakers' pain, as most of the parts suppliers had a difficult year due to the massive problems in the auto industry. For some suppliers, these problems may have turned into a fight for survival, though it's difficult to tell for which ones at the moment. With Chrysler's recent filing for bankruptcy along with General Motors' (NYSE:GM) distress, what had been a deep slowdown for auto production and its suppliers now appears to be poised for a stall with auto production shutdowns planned. Add to this the worry by suppliers of getting paid, and you can appreciate their difficult position. Let's look at some of the suppliers' situations.

Learn To Invest In 10 Steps

Bad Reports, Troubling Prospects
American Axle & Manufacturing Holdings
(NYSE:AXL), an auto supplier with three-quarters of its sales with GM, reported its quarterly earnings on May 1 with a 59 cent loss per share versus a 50 cent loss per share in the same quarter one year ago. With GM plants set to idle part of this summer, American Axle's revenue will doubtless be heavily affected. But American Axle also supplies Chrysler, and Chrysler is closing plants for 30 to 60 days while it works its way through the bankruptcy process. Chrysler is seeking permission from the bankruptcy court to help its troubled suppliers with as much as $550 million in financing through this time, while American Axle is assessing the possible effects of slow payments from any automaker. Investors need to assess both the immediate impact and the potentially ongoing damage from all this.

Magna Makes A Move On Opel
Suppliers aren't simply sitting still, though, watching what happens while doing nothing. Magna International (NYSE:MGA) has confirmed it's in talks with German officials as well as GM with an interest in taking a minority stake in Opel; reportedly as much as 25% in GM Europe. Magna is a large, international, Canadian-based supplier that reported a $1.79 per share loss in its earnings report for the period ended March 31. It also feels it's the most diversified auto supplier and implies that it's positioned to weather the industry's climate. Magna is a huge operation, so along with $33 billion in long-term debt, it does have $10.7 billion in cash. Its strong operations and potential move into ownership alliance with Opel gives it a greater chance at ongoing stability than smaller, more one-dimensional suppliers. (Find out what to consider before taking a ride with stocks from this industry; read Analyzing Auto Stocks.)

TRW Automotive Holdings
TRW Automotive (NYSE:TRW), 46% owned by the Blackstone Group (NYSE:BX), reported a quarterly loss of $1.30 per share. TRW was also put on S&P credit watch along with some other suppliers, with "negative implications" cited due to the "interconnectedness" of the supply base. With the grouping of the suppliers cited by S&P, "potential systematic risk" was mentioned, so that is merely a general warning about what we all know. The specific downgrade, however, factors in a potential bankruptcy also for GM and suggests that TRW might need to seek an amendment to its credit facilities later in the year. Even in the downgrade note, TRW's global and diversified nature were cited as positives.

(NYSE:SRI) reported a first-quarter loss of 49 cents per share. It has been accepted into the government-guaranteed receivables program for suppliers of GM and Chrysler, and it noted in its earnings release that its cash position, though diminished due to the severe downturn in business, is still adequate. Stoneridge, though a smaller-sized supplier than some, has a vital niche with its electronic engineering of truck components.

Harman International Industries
Harman International (NYSE:HAR), an audio and electronics components maker for cars, reported a 42% decrease in net sales to $598 million in its recent Q3 report and a loss of $1.09 per diluted share. It also noted that it amended its $270 million credit facility to enhance its liquidity, but CEO Dinesh Paliwal emphasized the benefits of a cost-cutting program already in place. Paliwal also cited aggressive new products, which include cutting-edge audio automotive platforms introduced despite the severe industry conditions. Paliwal emphasized that Harman will be strongly positioned to compete going forward.

Beyond The Headlines
Although Noble International, a supplier that makes rolled-steel components for Chrysler, GM and Ford, filed for bankruptcy April 15, most of the major suppliers are, though stressed, hanging in there. While the headlines scream dire things, most suppliers and the automakers, along with the government, are trying to work through not only Chrysler's bankruptcy but GM's potential bankruptcy in an orderly way, so that's a positive. The suppliers' plight has not, at least, been forgotten. The problem will be as these situations, as orderly as they can be made, grind on in the weeks and months ahead, even into the next several years, as an entire industry reformulates itself.

The Suppliers' Larger Problem
The weakness of all the suppliers, no matter how momentarily strong, is that they are dependent on the over-arching auto business in a way that makes them vulnerable beyond anything that can be considered the norm. The same can be said for their stocks. A supplier can be as well-run and efficiently managed as possible, but if the auto industry is not made materially healthier along the way, nothing the suppliers do will matter.

That said, watch the macro-developments surrounding the automakers, then see how quickly this permeates the business of the suppliers. Then look at the sales, earnings and balance sheets to see how the business conditions are working their way through the suppliers. There are some strong suppliers, well run, that should remain intact and healthy in the long run if the automakers are, though inevitably changed, at least improved.

Learn to identify the things that may impact your investments down the road. Check out Taking Global Macro Trends To The Bank.

Related Articles
  1. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  2. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  3. Fundamental Analysis

    Use Options Data To Predict Stock Market Direction

    Options market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
  4. Stock Analysis

    2 Oil Stocks to Buy Right Now (PSX,TSO)

    Can these two oil stocks buck the trend?
  5. Investing News

    What Alcoa’s (AA) Breakup Means for Investors

    Alcoa plans to split into two companies. Is this a bullish catalyst for investors?
  6. Stock Analysis

    Top 3 Stocks for the Coming Holiday Season

    If you want to buck the bear market trend by going long on consumer stocks, these three might be your best bets.
  7. Investing News

    Could a Rate Hike Send Stocks Higher?

    A rate hike would certainly alter the investment scene, but would it be for the better or worse?
  8. Investing News

    Corporate Bonds or Stocks: Which is Better Now?

    With market volatility high, you may think it is time to run for corporate bonds instead of stocks. Before you do take a deeper look into which is better.
  9. Mutual Funds & ETFs

    Using Short ETFs to Battle a Down Market

    Instead of selling your stocks to get gains, consider a short selling strategy, specifically one that uses short ETFs that help manage the risk.
  10. Investing Basics

    How to Diversify with International Stocks

    Diversifying with international stocks can benefit most portfolios, but beware of country risk.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!