Strattec Security Looks To Lock-In Potential

By Will Ashworth | February 07, 2012 AAA
Every day when you get into your car to go to work, there's a good chance the lock in your car door is made by Strattec Security (Nasdaq:STRT), a small Milwaukee-based automotive company. It sells to Chrysler, General Motors (NYSE:GM), Ford (NYSE:F) and others. With 20% of the global market share for automotive locks and keys that are sold to original equipment manufacturers, Strattec plays an important part in the safety of your car. It went through a tough time back in 2009, but now seems to be digging itself out of a hole. Value investors should take a look. Its unlocked potential is tremendous. (To learn more, read Value Investing: What Is Value Investing?)

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The Past

As with any stock that's stumbled, I like to go back to the really good times to see what's different between then and now. Usually, it's pretty apparent why things aren't going as smoothly. Strattec appears no different. In fiscal 2004 (June year-end), its gross and operating margins were 24.3 and 13.7%, respectively. In fiscal 2011, its gross margin was 16.2% or 810 basis points lower than in 2004. In terms of the operating margin, in fiscal 2011 it was 3.3% or 1040 basis points lower. Interestingly, revenues in 2011 were roughly 33% higher at $261 million.

Over the span of seven years, its profitability went in the tank thanks in no small part to the near collapse of the North American automotive industry. Despite the turmoil, Strattec lost money just once and that was in 2009, when three of its four largest customers were in bankruptcy protection.

The former Briggs and Stratton (NYSE:BGG) division opted in 2009 to preserve cash by reducing spending and cutting its dividend. Survival was more important than profitability and as we move into the second half of its 2012 fiscal year, Strattec looks ready to unlock its potential, both as a company and stock.

Stock Price

At its height on June 30, 2004, Strattec's stock closed at $68.43 around the all-time high and approximately 230% higher than its closing price on Feb. 1, 2012. In terms of valuation, its enterprise value in 2004 was roughly 5.13 times EBITDA compared to about 2.93 times today. Its price-to-book is one-third what it was in 2004. Every valuation metric you care to use demonstrates the same thing: prosperity is in the rearview mirror. (For related reading, see Investment Valuation Ratios.)

The Future
With such a staggering decline from its peak, it's easy to overlook Strattec's recent improvements. Sales to Ford and Chrysler in the second quarter increased around 33 and 27%, respectively. Only at GM did it see a decrease year-over-year. Most importantly, gross profit margins were 17.1% compared to 16.3% in the prior year.

That is its highest gross margin in the second quarter since 2007 and within 710 basis points of its 2004 second quarter gross margin. Let's say it only makes up half of that in the next couple of years. That would still help push its annual gross margin above 20%. As long as the operating margin were to keep pace, this alone would put upward pressure on the price of its stock.

Strattec's business has changed quite a bit in the last decade. Consider that in fiscal 2001, its key and lockset business accounted for 75% of net sales. Today, this segment is responsible for just 31% of net sales. Since 2001, two additional streams of revenue have been created. This past fiscal year, power access door latches and door handles respectively generated 25 and 10% of its $261 million in overall net sales.

Strattec now has six streams of revenue compared to three in 2001. As a result, it's a much more diversified business that's able to compete globally through its Vehicle Access Systems Technology partnership with two other suppliers. As every day passes, Strettec is looking more like its old self. In a good way.

The Bottom Line

Since its spin-off in 1995, Strattec has spent approximately 28 months trading under $20 out of a total of around 193. Can it make it back to $68? I have no idea. But what I do know is that $20 is probably much too low given the state of its business. (For additional reading, see Analyzing Auto Stocks.)

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At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.
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