Thursday, November 05, 2009

TRW Automotive (NYSE:TRW): Upgraded to Buy at Keybanc with a $29 price target

TRW Automotive (NYSE:TRW) is getting positive commentary from two firms this morning following results out yesterday morning:

- Keybanc Capital Markets is upgrading TRW to a Buy from Hold and is initiating a $29 price target on the name.

According to the analyst the upgrade is based on their belief that: 1) as global light vehicle production returns to normalized levels, TRW's operating margins are likely to be higher than their historical range; 2) TRW will likely generate solid free cash flow going forward, which they believe will be used to reduce debt, interest expense and improve the Company's balance sheet; and 3) there is good possibility the Company's U.S. operations could become profitable once production returns to normalized levels and, because of TRW's substantial deferred tax assets, the Company will not be a tax payer in the United States for many years, which will likely drive free cash flow higher than historic levels. Due primarily to better than expected sales and margins, they are raising their earnings estimates to $0.45 from a loss of $0.90 (First Call consensus a loss of $0.51) for 2009 and to $1.76 from $0.58 (First Call consensus $1.18) for 2010.

- Keybanc is confident that global light vehicle production has begun its gradual trend toward more normalized levels and, as global light vehicle production moves higher, TRW operating margins are likely to be higher than the historical range of 4-5%. Firm's normalized earnings analysis indicates that if operating margins are between 5.0-5.5% and North American and European production returns to 12 million-13 million units and 17 million-18 million units respectively, TRW could generate earnings in the range of $2.57-$3.20.

- They believe that financial risk has largely abated given covenant relief from TRW's banking group, a completed $269 million equity offering, and the stabilization/improvement in auto sales and production in 2H09 from 1H09. Going forward, the firm believes TRW will likely generate solid free cash flow, which they believe will be used to reduce debt, interest expense and improve the Company's balance sheet.

- There is good possibility the Company's U.S. operations could become profitable once production returns to normalized levels. Because of TRW's substantial deferred tax assets, the Company will not be a tax payer in the Untied States for many years, which will likely drive free cash flow higher than historic levels.


- Credit Suisse reits Outperform on TRW and is raising target to $25 (prev. $19).

Notablecalls: TRW will get a nice bump on this. I'm somewhat surprised by Keybanc's comments re: global light vehicle production but I guess they know best.

I expect TRW to trade toward $19.50 level and with a little help from the market it can challenge the $20 level in the n-t.

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