11/12/2009
By David Silver, Research Analyst

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In a time when government bailouts have become commonplace, an act of true capitalism has found its way back.  There is no question that the auto industry was completely decimated by the economic crisis. Seeing as the industry is pivotal to the U.S. economy, the auto makers got government handouts in the form of direct cash infusions (some for equity) while others saw government incentive spending which boosted sales.  Following the food chain for the auto industry, one could argue that the cash for clunkers program helped auto parts suppliers too, but it was the industry's only form of "bailout." The Auto Task Force and President Obama denied the auto parts suppliers industry its own bailout, however, the government did lend a helping hand guaranteeing many of the owed payments from the auto makers. So without direct government aid, many auto parts suppliers were forced into bankruptcy, and if history has showed us anything, it would be a long arduous trip back out of bankruptcy for these companies.  More recent examples are the problems with Dana Corporation (DAN) and Delphi, which are still struggling to emerge from bankruptcy. 

Unlike these companies, Lear Corporation entered into bankruptcy on July 7 and on November 11 the Company emerged from Chapter 11 bankruptcy protection. Last week, a judge approved the Company's reorganization plan, and it was given the go ahead to exit bankruptcy. Under the reorganization plan, Lear's lenders forgave $2.8 billion in debt in exchange for equity. Lear says it now has less than $1 billion in debt at competitive interest rates with no near-term maturity.  Lear also says it has $1 billion in cash on hand and $1.4 billion in sales lined up through 2012 despite the automotive industry downturn. More than half of those sales are in higher-margin electronics and come from outside North America, further diversifying Lear's portfolio.  Lear also is replacing six of its nine board members.

Former shareholders were cancelled, while the Company offered new common shares.  The shares will eventually trade with the same ticker, LEA, as it previously traded under, however, that is not expected until later this week or next week.  For the auto parts suppliers sector, we are still expecting a wave of consolidation as the industry becomes more specialized.  Our favorites in the space are companies that have built a niche for next generation demands, for instance Johnson Controls (JCI) and its Power Solutions segment produce batteries for hybrid and fully electric vehicles, while BorgWarner (BWA) has multiple drivetrain and powertrain products that improve fuel efficiency as well as decrease emissions.

David Silver
Wall Street Strategies