Kicking the tires at the French auto parts and components maker Valeo SA (VLOF.PA), our StarMine models find a lot of bullish indicators. Valeo has both market sentiment and analyst sentiment moving in its favor. The stock also appears inexpensive; its earnings are of high quality (i.e. derived from sustainable sources) and it has financial characteristics that institutional investors are currently seeking when looking for new equities to add to their portfolios (Smart Holdings).
Let’s start with the bullish markers:
Source: Eikon/StarMine
An overview on Eikon
For Eikon users, this StarMine Alpha Models Highlights View is available on the Companies Overview page. If you haven’t already installed the widget, we invite you to do that by clicking the “Edit layout” button located here: (or request a free trial http://lipperalpha.financial.thomsonreuters.com/solutions/)
Source: Eikon
Stepping on the Accelerator
Last Tuesday, automakers reported surprisingly strong new car sales. As Reuters reports here, U.S. new car sales of 1.6 million in May came in better than expected — representing an 11.3% annual increase. This was the highest growth rate since before the 2008 recession. While we’re not prepared to declare this sustainable, perhaps consumers have deferred replacing their old cars about as long as they could. If so, the auto supply chain may shift into high gear.
There has been a dramatic acceleration in Valeo’s financial returns since 2009. Prior to the recession, Valeo’s return on net operating assets basically matched the industry median. Since then, it has pulled ahead of the pack, with trailing six- month returns of 28.1% vs. the industry’s 21.8%. This is our measure of operating efficiency within the StarMine Earnings Quality (EQ) model which we saw in the models overview gets a rank of 93 out of possible 100 when compared to all companies in North America. Whatever Valeo’s management did to improve efficiency during the depths of the recession seems to have persisted.
Source: Eikon/StarMine, Reuters Fundamentals
Revving Free Cash Flows
Likewise, free cash flows have never been stronger. This also contributes to the company’s high EQ score since earnings backed by cash tend to be more persistent and reliable. During the December 2013 interim period, Valeo generated 409MM euros of free cash flow, compared to net income of 249MM. FCF was the highest of any period over the 10 years of data shown below.
Source: Eikon/StarMine, Reuters Fundamentals
Despite a stock price that has appreciated 26% YTD, based on sellside estimates and the StarMine Intrinsic Valuation (IV) DDM based calculations, the stock may still be undervalued. Even after making downward adjustments to analyst estimates to compensate for the pervasive optimism bias, the IV model calculates a forward five- year EPS compound annual growth rate (CAGR) of 12.4%. This is above the company’s own trailing five-year CAGR, but in line with its peers’. If it can achieve this growth rate, fair value works out to 140 euros per share. The market has priced in more pessimistic growth assumptions. The market implied growth rate is only 6.3%.
Source: Eikon/StarMine, I/B/E/S estimates
Start your Engines
Professional investors screening for French or European companies that may grow faster than market expectations, post improved financial fundamentals and carry moderate valuations, may find Valeo worthy of additional research. The rest of us can maintain hope that better results from the auto industry and its supply chain may be an indicator of improving consumer confidence and better industrial and economic performance down the road.
Receive stories like this to your inbox as they are published. Subscribe here and follow us @Alpha_Now on Twitter or check out the Eikon blog. If you are looking to access our data or analytics, register for a free trial.
