Dugald Campbell knows something many financial investors have yet to discover: some of the best investment opportunities are among automotive parts suppliers.
The chief executive of Tower Automotive Inc., an auto parts stamping company in the USA, produced three-year shareholder returns of nearly 60 percent, well above the 26 percent average return of the country's Standard & Poor's index of 500 stocks.
Investor pessimism over the automotive supply sector as an old-fashioned industry on the verge of a collapse comes as no surprise. The reasoning is that any rise in interest rates will lead to a slowdown in the economy, lower automotive sales and sharply reduced earnings.
But thanks to the unique opportunities in the auto industry, top performing suppliers such as Dana Corp., Federal-Mogul Corp., Meritor Automotive Inc., Valeo SA and others can capitalize on a consolidating industry and resist a downturn, according to a study of 44 automotive suppliers worldwide by the consulting firm A.T. Kearney Inc.
'Overall, the industry worldwide has some real stars,' said John Hoffecker, an A.T. Kearney vice president who heads the firm's automotive practice in Southfield, Michigan, USA. 'That has not been fully appreciated by many of the people on Wall Street.'
Tower exemplified a focus on total assets, growth and earnings -key factors A.T. Kearney used in determining its top 10 best financial performers worldwide. Tower was one of three North American companies with a three-year shareholder return over 34 percent. The others were Federal-Mogul Corp. and Textron Automotive Co. Inc.
Richard Snell, chairman and chief executive of Federal-Mogul, said: 'We stated that we would achieve solid financial results and have worked hard to achieve that goal.'
Textron spokesman L. Craig Miner said the company's strategy of targeting 'systems integration, proprietary technology and growth in world markets achieved double-digit growth in an industry where single-digit growth is the norm.'
Hoffecker said the stock market values a commitment to focus on the auto parts industry, or a decision to get out. Decisions by ITT Industries Inc. and United Technologies Corp. to withdraw from the auto industry were rewarded by rising share prices.
He said top-rated auto suppliers benefited from a consolidating industry. As suppliers become more 'full-service,' they will be able to help automakers focus on marketing and distribution by handling the manufacturing.
Hoffecker also sees new opportunities in taking business away from automakers' spun-off parts suppliers. Toyota spun off Denso Corp. in 1996; General Motors severed its Delphi Automotive Systems group this year; and Ford Motor Co. is preparing to separate from Visteon Automotive Systems.
Hoffecker said top-rated suppliers got that way by focusing on increased productivity of company assets, boosting earnings, and growing aggressively.
Autoliv Inc. of Sweden, for example, was cited by A.T. Kearney as tops in return on assets used in its business over the three-year period.
Eaton Corp. was the top earnings performer with an average 14.4 percent earnings-to-sales ratio.
Suppliers continue to face automaker pricing pressure, challenges from new competitors and the threat of recession.
But half the firms A.T. Kearney surveyed are positioned to resist cash-flow problems in the event of decreased auto production. That is a substantial increase from previous years, he said.
Hoffecker said suppliers have many choices. Suppliers can choose to build systems, components or complete modules. They can choose to acquire, divest or partner with other suppliers, he said.
Or they can choose to focus in a single area or extend their products and technology 'to own a larger part of the car,' he said.