Niche leaders cope with slow car sales

The slowdown in the automotive industry has hurt the earnings of these four companies, which serve a number of auto-dependent customers. The potential bankruptcy of General Motors and Chrysler is also a risk factor.

However, all four are leaders in their niche markets, which gives them special appeal. Their strong balance sheets will also help them weather the recession. We see all four as particularly attractive buys for long-term gains.

GENUINE PARTS CO. $34 (New York symbol GPC; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 159.4 million; Market cap: $5.4 billion; Price-to-sales ratio: 0.5; WSSF Rating: Average) distributes automotive replacement parts to over 4,700 independent outlets in North America. It also owns over 1,100 auto parts stores under the NAPA banner.

The company distributes parts for older cars, so it stands to gain as the recession prompts drivers to fix their current cars instead of buying new ones. Genuine’s focus on older vehicles also means the possible bankruptcy of GM or Chrysler will not have much impact on its business.

Genuine Parts has moved to reduce its exposure to the auto industry over the past few years. Increasingly, the company has been distributing other goods, including parts for industrial machinery, office supplies and electrical equipment. These other businesses now account for half of its revenue.

In the three months ended March 31, 2009, Genuine earned $89.2 million, or $0.56 a share. That’s down 27.8% from its year-earlier earnings of $123.5 million, or $0.75 a share. Still, this beat the $0.49 a share that analysts were expecting. Sales fell 10.8%, to $2.4 billion from $2.7 billion. All four of the company’s divisions reported lower sales.

Genuine Parts’ $500-million long-term debt is a low 9% of its market cap. It also holds cash of $133.3 million, or $0.84 a share. These factors will help it cope with the recession. The stock trades at 14.5 times its forecast 2009 earnings of $2.35 a share. That’s reasonable in light of Genuine’s strong balance sheet. The $1.60 dividend still seems secure, and yields 4.7%.

Genuine Parts is a buy.

SNAP-ON INC. $32 (New York symbol SNA; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 57.6 million; Market cap: $1.8 billion; Price-to-sales ratio: 0.7; WSSF Rating: Average) makes hand and power tools for auto mechanics.

Snap-On sells its tools using a fleet of franchised vans that visit garages. This method helps the company build relationships with its customers. It also cuts shipping costs, and gives Snap-On a big advantage over its competitors.

Like Genuine Parts, Snap-On should benefit if, as expected, the recession prompts drivers to put off buying new cars and fix their current ones. Moreover, the company’s older-car focus means the potential bankruptcy of GM or Chrysler should have little immediate impact on its operations.

Still, the recession has hurt demand for Snap-On’s tools and vehicle diagnostic equipment. The company’s earnings in the three months ended April 4, 2009, fell 35.5%, to $37.2 million from $57.7 million a year earlier. Earnings per share fell 38.1%, to $0.60 from $0.97. Sales fell 20.6%, to $572.6 million from $721.6 million.

Snap-On continues to benefit from its ongoing plan to streamline production and cut waste. In the latest quarter, these reductions saved it $18.2 million. To lower its costs further, the company has shifted more of its manufacturing to China and eastern Europe.

To conserve cash, Snap-On will lower its 2009 capital spending, to about $65 million from its previously announced plan of $75 million. Its $652.9-million long-term debt is a manageable 36% of its market cap. It also holds cash of $400.7 million, or roughly $7 a share. The stock trades at just 10.7 times Snap-On’s likely 2009 earnings of $3.00 a share. The $1.20 dividend yields 3.8%.

Snap-On is a buy.

MTS SYSTEMS CORP. $22 (Nasdaq symbol MTSC; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 16.9 million; Market cap: $371.8 million; Price-to-sales ratio: 0.8; WSSF Rating: Average) makes equipment and software that manufacturers use to test materials, machines and structures. This helps them cut their costs and improve the quality of their products.

MTS makes 80% of its revenue by selling testing systems. It gets the other 20% by making sensors that improve the performance of automated industrial machinery.

Unlike Genuine Parts and Snap-On, MTS sells its testing systems to GM, Chrysler and other carmakers. However, the company gets 70% of its revenue from customers outside of the U.S. This should help shield it if one or more of its major American clients declares bankruptcy.

In MTS’s second fiscal quarter, which ended March 28, 2009, sales fell 4%, to $107.7 million from $112.2 million a year earlier. Earnings fell 44.6%, to $7.5 million from $13.5 million. Per-share earnings fell 42.1%, to $0.44 from $0.76, on 5% fewer shares outstanding. However, the latest quarterly earnings included a $2.8-million pre-tax charge related to MTS’s plan to cut 150 jobs, or 6% of its workforce.

The stock trades at 16.4 times MTS’s likely 2009 earnings of $1.34 a share. The $0.60 dividend yields 2.7%. MTS holds cash of $99.3 million, or $5.88 a share, and its debt is just $41.4 million.

MTS Systems is a buy.

QUAKER CHEMICAL CORP. $11 (New York symbol KWR; Income Portfolio, Manufacturing & Industry sector; Shares outstanding: 10.9 million; Market cap; $119.9 million; Price-to-sales ratio: 0.2; WSSF Rating: Average) makes lubricants and chemicals that keep mechanical parts from corroding.

Quaker gets 90% of its sales from customers in the steelmaking and automotive industries, both of which have been hit hard by the recession. But the company has a broad customer base: its five largest customers accounted for just 28% of its total sales last year.

In response to the slowing demand, Quaker plans to cut 10% of its workforce over the next few months. Partly because of $2.9 million in severance costs, earnings fell 28%, to $11.1 million from $15.5 million the previous year. Earnings per share fell 31.4%, to $1.05 from $1.53 on more shares outstanding. Quaker’s 2007 earnings included a $3.3-million charge to settle an environmental lawsuit.

A $3.5-million charge related to the replacement of Quaker’s chief executive officer also weighed on the company’s earnings. The previous CEO retired last October, and signed a new consulting deal that will cost Quaker $5.8 million over the next two years.

Quaker’s sales rose 6.6% last year, to $581.6 million from $545.6 million. However, about two-thirds of that gain came from favourable foreign currency rates. Quaker makes 60% of its sales outside the U.S., and the lower American dollar increased the value of their contribution.

The company holds cash of $20.9 million, or $1.94 a share. Its $84.2-million long-term debt is somewhat high, at 80% of its market cap.

Quaker uses oil to make its chemicals and lubricants, so it should benefit from lower oil prices. It will probably earn $0.63 a share this year, and the stock trades at 17.5 times that figure. Quaker’s quarterly dividend of $0.23 a share gives it a high annual yield of 8.4%. In light of its weaker sales outlook, a dividend cut seems likely. But even if Quaker cut the payout in half, the shares would still yield about 4%.

Quaker Chemical is a buy.