Valeo's Outperformance Relative To Underlying Volume May Be The Start Of The Turn

I can understand why sell-side analysts would see light at the end of the tunnel at Valeo (OTCPK:VLEEY) (FR.PA) and assume it’s an oncoming train. That’s what happens when you miss guidance for two and a half years, offer vague and unconvincing explanations of those misses, and generally make any bulls look foolish. And yet, the markets tend to have short memories if and when companies turn around their performances, so maybe, finally, my bullish thesis on Valeo doesn’t feel so foolish.

I’m not changing any of my core assumptions in any meaningful way, as there’s still a lot of “show me” to this story. Still, 5% revenue growth for a company with a strong hybrid/EV order book (if they can deliver…) and strong FCF growth (if they can deliver…) doesn’t seem out of line, and would support a meaningfully higher share price from here, even after a recent rally that has seen the stock outperform peers/rivals like BorgWarner (BWA), Continental (OTCPK:CTTAY), and Schaeffler (OTC:SFFLY).

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Valeo's Outperformance Relative To Underlying Volume May Be The Start Of The Turn

Valeo Hits The Wall, And The Wall Falls On Top Of It

The last year was a tough one for auto parts suppliers in general, particularly after midyear and especially for European suppliers, but it was an abysmal year for Valeo (OTCPK:VLEEY) [VLOF.PA] as the shares lost about half their value on successive miss-and-lower quarters that eventually saw management's outlook for 2019 erode from double-digit growth to low single-digit growth with lower margins.

I don't believe that Valeo is fundamentally broken, but investor confidence in management clearly is, and I can't say that that is unfair. The magnitude of the guidance revisions has been significant, as has been the discrepancy with order growth and the large order write-off in China, all of which leads to ample uncertainty about the company's outlook. While I do believe that Valeo has assembled a very strong position and platform for electrification, that assembly has led to high upfront costs with the payoff coming further down the road. I do still believe that Valeo is undervalued, but this is a company that is deep in the doghouse and will need time to reemerge.

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Valeo Hits The Wall, And The Wall Falls On Top Of It

Valeo Pounded Down On A Weak Transition Period

I had previously written that I thought Valeo (OTCPK:VLEEY) (VLOF.PA) shares could remain weak as the company stumbled through a weak transitional period, but I didn’t expect the shares to fall by a third on a year-to-date basis. Granted, the sector has been weak (BorgWarner (BWA) is down about 12% year-to-date, as is Schaeffler (OTC:SCFLF), and Continental (OTCPK:CTTAY) and Faurecia (OTCPK:FURCY) are down closer to 15%), but it seems like the shares have been hammered beyond what admittedly weaker-than-expected near-term results would other deserve.

Valeo management is calling for double-digit revenue growth next year, but the sell-side’s stance seems to be more along the lines of “yeah, sure you will…” and the market is not giving much credit for a backlog that should drive meaningful growth in few years’ time, particularly in new hybrid and EV programs. Although Valeo’s performance is doing nothing to build confidence today, if management can deliver better results in the fourth quarter (the third quarter is not looking promising), maybe these shares will finally recapture a little investor support.

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Valeo Pounded Down On A Weak Transition Period

Timken Looking Forward To Leveraging A Big Transformation

Companies change over time, but Timken (NYSE:TKR) has actively sought to remake itself to a pretty significant degree over the past decade. In addition to spinning off Timken Steel (NYSE:TMST), this leader in bearings and power transmission components has jettisoned around $1 billion in lower-margin business over the past seven or eight years, while recommitting to long-term growth through collaborative product development.

Such has been the rally in the industrial space that I pause when I see a stock where the valuation looks interesting. While the stock already trades at a pretty healthy forward EBITDA multiple, mid-single-digit FCF growth should be able to support a total annual return of over 10% from this level. While I would be careful about buying any industrial stock at this point (for fear of a big correction when the earnings and guidance start rolling in in January), this is a name that definitely merits some consideration.

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Timken Looking Forward To Leveraging A Big Transformation

Seeking Alpha: SKF's Erosion Is Cause For Concern

Bearings are virtually ubiquitous in manufacturing and transportation, so I don't believe it is a stretch to say that Sweden's SKF (OTCPK:SKFRY) can be an invaluable barometer of early-cycle trends. That makes the company's ongoing erosion in organic growth worrisome, even allowing for the possibility of company-specific issues playing an increasing role.

SKF's new CEO seems to be taking the company in a disappointingly less-open direction, and the market really hasn't gotten much specificity regarding price/mix, the restructuring plans for the automotive segment, nor the ongoing cost reduction initiatives. That might not bother me as much if the shares were a bargain, but I don't see a lot of reason to lean toward giving a benefit of the doubt right now.

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SKF's Erosion Is Cause For Concern