Automotive suppliers at the Society of Automotive Engineers (SAE) World Congress in Detroit this month showed a vast array of advanced technologies that could transform the driving experience as we know it.
In other industries, such innovation would set stock prices soaring. But parts makers remain out of favor on Wall Street. Even companies boasting strong earnings, steady cash flow and analyst recommendations to buy, buy, buy are watching their stock prices flatten or fall.
The force behind this decline is no mystery. It's the Old Economy vs. the New Economy. Investors are pouring money into Internet and technology companies that, for now at least, offer more promise than profits.
Executives at two major suppliers say investor misconceptions about the industry and its growth potential are partly to blame.
'If you go back and track the last 25 years, this cycle has (occurred) in the past,' said J.T. Battenberg, CEO of Delphi Automotive Systems Corp. in Troy, Michigan, USA. 'Never to this depth or length of time, but I think people will begin to recognize the value of auto companies and auto stocks and supplier stocks here in due course.'
Delphi, the world's largest automotive supplier, is a financially healthy, technologically-strong company. But it has been struggling to win over investors after splitting from General Motors last year.
The company booked $33 billion in new business in 1999, more than $5 billion of it in new technologies, mostly electronics. Earnings grew 22 percent, profit margins were up nearly a point to 3.7 percent, and Delphi ended the year with $2.5 billion in cash with minimal debt.
'There's nobody on Wall Street that doesn't say, 1/8Buy Delphi,'' Battenberg said. Yet, Delphi stock is selling at about $16 a share, down 27 percent from its 52-week high of about $22.
Battenberg said that's because, in part, of investor worries that the industry is doing too well. They are concerned that volumes - 17 million vehicles in North America last year - are too high and cannot be sustained.
He called such worries 'overdone.'
Richard Dauch, chairman, CEO and president of American Axle and Manufacturing Inc. in Detroit, says investors have overreacted to New Economy companies.
American Axle's stock price has varied from about $17 when the company went public in January 1999 to about $13 currently. But it has been moving up in 2000, and Dauch predicts that will continue for his company and other industrial stocks.
'The investor community will recognize that the industrials are not old school,' Dauch said. 'They are not dinosaurs; they utilize technology as well as anybody in the world.'
John Casesa, an analyst with Merrill Lynch who watches supplier companies, agrees that the decline in stock prices fits a historical pattern and likely will turn around at some point.
But innovative technologies and ventures into e-commerce mean little to investors unless accompanied by strong growth and returns. 'That hasn't happened in this industry,' he said, but the prospects for improvement are good if the supplier base continues to consolidate.
Joe Magliochetti, president and CEO of Dana Corp., has made creating shareholder value a primary objective for the company in 2000.
Dana of Toledo, Ohio, posted record sales and profits in 1999, but its share price dropped from a 52-week high of about $54 last June to a 52-week low of about $20 last month. On March 15, it closed at about $23.
Buying back shares to reduce dividend payments and to increase per-share earnings is one element of Magliochetti's plan. He also wants to speed up Dana's use of information technology and do more with e-commerce.
'We've said, 1/8Look, we've got to continue dealing with the fundamentals, managing the business as effectively as we can,'' Magliochetti said. 'At some point, this will be rewarded in the marketplace.'
If the price slump continues well into the future, however, the consequences could be severe for financially struggling suppliers, Magliochetti said. They won't have the share capital they may need to help fund growth through consolidations or acquisitions.
It may take more than dampened enthusiasm for the new economy to pull investors back to the auto industry, though.
A key driver will be how strong earnings are when the auto industry comes down from its current high, said David Cote, TRW Inc.'s president and chief operating officer.
TRW of Cleveland has watched its stock price rise to a 52-week high of $57 this month after reaching its 52-week low of $39 in January. But spokesman Jay McCaffrey attributes the gain mostly to technology announcements in TRW's non-automotive businesses.
Cote said investors want predictable earnings increases. 'Anything that inhibits that creates problems,' he said. 'Unfortunately, with the auto industry's ebb and flow, that's one of the things that hurts us.'
One likely response: Cote says TRW needs to shed some of its automotive assets.
