Our stock pick this week is one that many investors have probably never heard of, but whose products they use daily without even realizing it. Buying into a company that provides a key product to one of the biggest industries in the world can be a boon for your portfolio. Discovering that such a company that is also undervalued is an even bigger plus. Our pick this week is one such company: Strattec Security Corporation (STRT).
Keeping Automobiles Safe
Strattec Security provides mechanical locks and keys, electronic locks, and other latches and housings to some of the world’s biggest automobile makers. Even as new technology is being fitted into cars, security will always be a concern for automobile owners. The first line of defense and easiest way to make a car secure is by adding a lock or locking mechanism. Strattec does just that and as the automobile industry grows, so does Strattec.
Growing the Business
Prior to 2010, Strattec was experiencing a downturn that coincided with the Great Recession in 2007-2009. Along with the large financial institutions, many automobile manufacturers had to be “bailed out” and saved from bankruptcy. Since this event, and seeing the worst results in company history in 2009, Strattec has become increasingly more profitable and attractive.
Since 2009, Strattec has grown after-tax profits (NOPAT) by an astonishing 85% compounded annually. As the economy and automobile industry has rebounded, Strattec has more than capitalized on the opportunity. Over this same time frame, the company increased its return on invested capital (ROIC) from -14% in 2009, to 14% in 2014. Money being spent on the business is generating increasingly greater returns.
In 3Q14, Strattec grew sales 54% over 3Q13. Much of this increase was due to a $28 million incremental service parts sale to General Motors due to the company’s infamous ignition switch recalls. While the company expects sales to General Motors to adjust lower going forward and normalize, increased global vehicle sales also contributed to the sales increase, showcasing the continued growth potential.
Undervalued Despite Rapid Stock Increase
Strattec’s stock price has increased over 80% this year, but is still undervalued by the market. Exuberance over the excellent earnings release in October propped the stock up over 30%, but it has since drawn back in. This decline in price creates an excellent buying point.
At its current price of ~$83/share, Strattec has a price to economic book value (PEBV) of 0.9. This ratio implies the market expects Strattec’s NOPAT to permanently decline by 10% from current levels. Given the company’s rebound since the economic crisis, as well as continued revenue growth, outside of just the General Motors sales, this expectation seems overly pessimistic.
If we assume Strattec can grow revenues by 10% compounded annually for the next 10 years, the stock is worth $185/share today –– an amazing 122% upside. Even if Strattec fails to grow by 10%, the upside is still impressive. Its current economic book value per share, or its zero-growth value, is $97/share.
As informed investors, you should always seek companies that are undervalued and consistently growing. As a bonus, if a company is trading below its economic book value, and has similar traits to those detailed above, its stock can be viewed as a steal in today’s market that is flush with overvalued companies.
Kyle Guske II contributed to this report.
Disclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, style, or theme.