A long goodbye as motor industry heads for East
Published 19/09/2016 | 02:30
There is scarcely a busier place than under the bonnet of a car. There was a time when oily-fingered lads used to spend long and happy weekend hours tinkering with carburettors or fiddling with clutches - but no longer.
It is a pastime that has no appeal these days, probably because cars are now supervised by computers. A forbidding casing now prevents curious amateur mechanics from bringing their unwelcome attention to the mysteries of the internal combustion engine. That is not to say that there is still a lot going on under what the Americans call 'the hood'.
One company that knows all about this is the French outfit, Valeo, which for nearly a century has been making and supplying car and truck parts to every major auto manufacturer from General Motors to Toyota and Tesla, Volkswagen and Volvo. It was set up in 1923 to distribute brake linings that were hitherto imported into France from Britain. It decided to manufacture its own brake-linings and clutches and this business got a 'turbo-charge' after WWII when Valeo's range of products was widened and the business was expanded to the rest of Europe as well as the Americas and China.
The group now trades in 34 countries, where it operates 134 plants and employs 83,000.
Valeo boasts a 'Visibility' business which has nothing to do with transparent accounting. Its 'Visibility' division produces lighting systems and windscreen wipers and this division had a turnover in 2015 worth €4.2bn and profits of over €500m.
It is also in the heating, ventilation and air-conditioning (HVAC) business and that is worth another €4bn in turnover.
The irresistible trend towards low car emissions and the demand to keep the driver safe from air pollution (a particular concern in China) has been important to Valeo, which believes that this trend will propel its impressive earnings growth as far ahead as 2025.
With more and more technology going into cars, that seems the safest of bets.
Valeo also has a Powertrain business which is also highly profitable making electrical systems, and systems for noise diminution and again cutting down on excessive fuel usage. 'Powertrain' last year had sales of €3.8bn and profits of €480m. The company has also put its smartest brains to work on the creation of the newest and flashiest gadgetry for cars, like parking assistance cameras, radar for 'blind spots' as well as rain/light/humidity detectors, and touch-screen displays - things that the 'engine tinkerers' of long ago would have considered to be pure science fiction.
Valeo sales of €14.5bn can be broken down geographically into half from Europe, mainly Germany and France. North America delivered €3.2bn in revenues while China, the world's largest auto market, chipped in €2bn worth of sales.
A substantial pick-up in Europe last year was accompanied by continued expansion in North America and China. Net income hit €774m, some 30pc higher. Dividends were up at €3 per share while the group also managed a reduction in net debt. The share price performance, hardly surprisingly, has been one to gladden the heart of the more demanding shareholder. Since 2013, the price has taken off and peaked at €50. It is trading just below the record high at €49, boasts a market capitalisation of €12bn, with a modest price-to-earnings multiple of 14.
A number of interesting features emerge from even a superficial study of companies in the motor business, like Valeo. While the global auto market is still growing it is not growing where it once did. Production is unquestionably shifting to Asia along with the jobs it provides. Companies like Valeo are moving with the action. It has declared its intention to strengthen its presence in Asia and in the high-growth emerging markets. Europe's business share is certain to fall. With Google and Tesla driving technology change in the auto industry, there are interesting times ahead for value - and its shares.
Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.