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Coverage Initiation: Visteon Corp.
Among the introductory pages of the 2010 Visteon Corporation (VC) annual report is the title “The New Visteon.” This is a statement that holds more truth than it would seem at first blush as Value Line initiates coverage of this automotive parts supplier in The Value Line Investment Survey. That said, the name Visteon is probably very familiar to long-time customers.
Visteon traces its lineage to U.S. auto giant Ford (F). In January of 2000, Ford created Visteon as a holding company for substantially all of the assets and liabilities of the automotive components and systems business. Shares in the newly created Visteon were then distributed to Ford shareholders. Both Ford and General Motors (GM) separated out their components businesses around the same time.
The spinoff, however, left Visteon with some major operational risks. First and foremost, the company pretty much had only one customer—Ford. So it was somewhat captive to its former parent. Second, having taken on Ford’s assets, left the company with a relatively high-cost labor force at a time when low-cost labor in foreign markets, particularly in Asia, was starting to create material upheaval in the industry.
Ford eventually took back 23 of Visteon’s North American facilities in 2005. The move was driven partly by labor issues. The facilities accounted for about $6 billion in sales in 2005. After the move, Visteon started to restructure its remaining operations, including the closure of 14 facilities and the sale of seven others. These efforts, however, were not enough to offset the impact of the 2007 to 2009 recession, which crippled the auto industry and caused both General Motors and Chrysler to plunge into bankruptcy, ultimately leading Visteon to declare bankruptcy in May of 2009.
Visteon emerged from bankruptcy in its current form in October of 2010. At the end of that year, its operations consist of 71 owned or leased manufacturing facilities around the world supporting three major lines of business; Interiors, Climate, and Electronics. The company also had 33 corporate offices. Non-consolidated affiliates operate an additional 24 manufacturing and assembly facilities, primarily in Asia. The company primarily sells to original equipment manufacturers (the world’s major car companies).
The Climate group makes automotive heating, ventilation, air conditioning, and powertrain cooling components. The Electronics group makes in-vehicle entertainment, driver information, wireless communication, climate control, body and security electronics and lighting products. The Interiors group, meanwhile, supplies cockpit modules, instrument panels, door and console modules, and interior trim components.
Visteon sells its products to most of the major automotive manufactures, including BMW, Chrysler, Ford, General Motors, Honda (HMC), Toyota (TM), and Kia Motors. Ford, the company’s former parent accounted for 25% of 2010 sales, while Kia accounted for 29%. Two customers accounting for 54% of sales is a material concentration risk for the company about which investors should be aware. Note, too, that the company’s business is focused on supplying products to a single industry, making the noted customer concentration perhaps even more pronounced in an industry that is highly competitive.
Indeed, the automotive manufacturers are becoming increasingly reliant on their suppliers for larger and larger portions of their finished products. For example, Visteon’s Interiors group makes cockpit modules in their entirety and simply get put into the car with minimal, if any, additional modification from the carmaker. The same is true throughout Visteon’s product lineup, and of its competitors’ offerings. Thus, there is competition among the auto parts makers over increasing the percentage of a car that their products touch.
This situation has led to increasing specialization, as auto parts suppliers focus on their strongest product offerings. With whole segments of a car coming from one supplier, losing a contract can be a material event. That said, winning a contract is a major positive. This dynamic also increases the need for continued investment in research and development. Such efforts support the company’s patent portfolio, which is similarly important to long-term results.
The small number of potential customers for Visteon’s products also makes the financial strength of those customers an important long-term factor. Financial troubles at a single automaker could have a material impact on Visteon’s performance. Similarly, the sales performance of individual car models can have an outsized impact if Visteon is supplying a significant percentage of the parts in that model.
Raw materials are another important factor for the company, as many of its products contain raw materials have volatile, market-based prices. Labor relations are also a concern, particularly with regard to union issues. That said, the company materially reduced its exposure to unionized workforces when it transferred select operations back to Ford in 2005. On the revenue side of the picture, sales of automobiles, and thus the parts that make them up, tend to follow the economic cycle, with stronger sales during good times and slower sales in economic downturns.
Subscribers can keep abreast of Visteon’s recent operations, and estimated and projected performance by monitoring Value Line’s ongoing coverage of the company.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.