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July 28, 2009
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ATC Technology Banking on Logistics Business
Aftermarket Technology Corp. (ATAC), the largest remanufacturer of transmissions worldwide, is scheduled to report second quarter 2009 results today, July 28.
For the quarter, ATC Technology expects earnings per diluted share of $1.67–$1.99 from continuing operations, including $0.16–$0.18 per share during the year for restructuring charges. Accordingly, the company’s revised 2009 guidance on an adjusted basis is narrowed from $1.80–$2.20 to $1.85–$2.15 per diluted share. This compares to $1.91 adjusted earnings per diluted share for the full year 2008.
ATC Technology revised its revenue guidance to $488–$539 million from $478–$520 million on the back of new wins in the Logistics business. The company anticipates a segment profit of $51–$60 million. Of this, Logistics revenue is forecasted to be $333–$365 million, marginally lower than the upper end of its previous estimate. For its Drivetrain business, ATC expects $145–$155 million in revenue and adjusted segment profit of $8.5-$9.5 million, excluding the $5.0–$6.0 million in previously announced restructuring charges.
The implementation of new policies governing the repair versus replace decision -- made by dealers in warranty applications -- is one of the greatest challenges facing ATAC. Due to this, dealers are replacing fewer transmissions with remanufactured units. This has led to a reduction in the volume of remanufactured transmissions sold to Daimler (DAI) and Ford (F) in the Drivetrain segment.
In addition, the demand for pricing concessions from customers in both the Drivetrain and Logistics segments is likely to continue, as prices fall by about 2% annually. The company relies on a few customers, namely Ford, DaimlerChrysler, Honda (HMC) and Cingular (collectively they generate 81% of sales), which makes the company susceptible to changes in arrangements and demands from these customers. Soaring raw material prices and the demand for concessions by these customers are expected to keep margins under pressure.
New business wins in the Logistics segment, coupled with continued strength in wireless and mobile devices distribution, are driving revenue growth. The Drivetrain segment is also positioned to do well in the long term, primarily driven by strength in its business with Honda.
Currently, ATAC is the largest remanufacturer of transmissions worldwide, with an 8% market share. This market grows at 4% annually and should grow due to an increasing number of 4–9 year old vehicles on the road.
ATC generates significant free cash flow per year and is earmarking it for debt reduction. We recommend a Buy and set a six-month target price of $35.00.
Read the full analyst report on "ATAC"
Read the full analyst report on "DAI"
Read the full analyst report on "F"
Read the full analyst report on "HMC"
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