Higher steel and fuel costs have affected the outlook for Visteon, which withdrew its guidance for third and fourth quarter revenues and earnings last week.
The company said that it would take a charge of between $US825 million-$900 million in the third quarter, in a writedown of deferred tax assets. It blamed the writedown on poorer production prospects for Ford in the fourth quarter, rising raw material prices and delays in executing the company’s cost reduction programme.
The news reversed the optimism that had followed Visteon’s upbeat second quarter results. In June 2004, SupplierBusiness.com reported that Visteon was showing the first glimmers of hope of a brighter financial performance after four years of losses as an independent supplier. This now looks premature.
Visteon shares fell more than 10% on the announcement and have recovered very little of that loss in subsequent trading. Standard and Poor’s placed Visteon’s BB+ rating on “CreditWatch with negative implications”.
Analysts say that the development is not a surprise based on Visteon’s original unrealistic fourth quarter production outlook for its main customer, Ford.
“We have limited confidence in the company’s ability to achieve our earnings expectations for this year and next,” say analysts at Deutsche Bank for example, while Chris Ceraso at CSFB cut his 12-month target pr ice by more than half to $5.
The average of analyst’s views on 10th September rated the stock a sell, according to a summary of First Call Earnings Estimates reported by Visteon.
Above all the company needs to move away from the legacy Ford businesses that have been such a drag on the group and allow its growing international operations to flourish in a healthy environment.
In Europe the group has made seen a major transformation of culture, locations and customers in the last three years. By 2005 the group expects to have 50% non-Ford business in Europe (counting PAG as part of Ford) – and sales are expected to rise from $3.2 billion in 2003 to above $4 billion by 2005.
The company has won major bluetooth contracts with BMW, and significant fuel tank business on the 2005 Volkswagen Passat, for example. Even the lighting business, which is significantly smaller than its direct competitors in Europe, appears to have carved out a niche for itself and has been winning business.
In Asia the group’s growth with non-Ford business has been even stronger, and Visteon has recently announced investment in China of $29.8 million in a climate control facility in Beijing and $80 million in a new compressor plant in Dalian.
But the company faces a major challenge in North America. Visteon is still heavily dependent on Ford, which is expected to account for 73% of sales in 2004. This makes Visteon slave to the success or otherwise of Ford’s product planning and marketing policies – and heavily exposed to unionised North American labour costs.
President and CEO Mike Johnston said that he recognises that “we need to take aggressive actions to structure our business in the US…to achieve a sustainable and competitive business”.
It has had very public difficulties in disposing of some of its non-core operations – such as its glass and steering column businesses to name just two that have been publicly for sale.
The pressure on the company to perform has resulted in some erratic-looking decisions over the last few months.
The company announced the sale of its Chicago modular assembly operation to minority-owned supplier Plastech Engineered Products, Inc. just five days after its grand opening.
The operation is responsible for the final assembly and sequencing of front-end modules, cockpit systems, fuel storage systems and climate systems for the Ford Freestyle, Ford Five Hundred and Mercury Montego.
Visteon cited cost advantages from Plastech’s ownership of the operation.
Visteon’s refocus away from module assembly is arguably a sensible move – its strengths lie more in systems technology and development than in lower value-added assembly operations.
But the move sits uneasily with interiors and cockpits remaining one of the core areas of focus for the company.
Such a move could weaken the position of the Interior products and systems area of the group ($3.65bn in sales in 2003) wit h respect to competitors that are taking responsibility for larger and larger parts of the interior.
The group is falling behind the rapid growth seen at rivals such as Johnson Controls, Faurecia, Lear and Magna (all much larger in a fairly consolidated market segment) – and it now lacks key elements of the interior package such as seats.
At least on the surface, another concern is that research and development spending looks to have suffered from the group’s troubles. This could make long-term recovery more difficult.
Visteon has clearly not made the commitment to new technology seen at leading automotive electronics suppliers such as Denso (8.4% of sales), Siemens VDO (8.3% of sales) or Bosch (7.3%), or its closest benchmark, Delphi.
While Delphi has maintained research and development spending over the last few years and raised its investment in new technology from 5.8% of sales in 2000 to 7.1% in 2003, Visteon has seen its research and develop ment spend slip as a percentage of sales from 5.7% in 2000 to 5.1% in 2003.
The company argues that it has become more efficient and focused in its spend and that there have been extra gains from investing in R&D. Visteon now has a strong range of interesting concepts to show for it, even if the product pipeline looks thinner.
But the future of the strong climate control business must be a concern. The company faces major investments to upgrade to new technologies as the environmental standards tighten and the industry moves to meet higher greenhouse gas emissions standards over the next several years.
In an auto stocks research note, Deutsche Bank analysts Rod Lache and Michael Heifler suggest that if the share price falls further, one downside risk “would be a scenario where Ford continues to let [Visteon] shares drift and buys in the company. The rationale for such a move could be that Ford might have more flexibility to fix Visteon’s problems outside the scrutiny of the public markets.”