Visteon: What's That Funny Noise?

Every Coke could use a Pepsi, and vice versa, if only to proclaim itself the better choice. Something just like that is headed our way on June 28, when Ford spins off its auto-parts maker. It's called Visteon, and it will be joining Delphi Automotive Systems, the captive parts supplier that General Motors set free last year. GM and Ford figure all the capital these giant operations guzzle can be better spent on new designs and smarter marketing.

That makes sense. But if you're one of Ford's 190,000 registered stockholders, you'll soon have a problem in your portfolio: Visteon. This child of Ford, which itself has long been investors' favorite U.S. auto stock, is set to underperform Delphi, the offspring of Detroit's longtime laggard (table). If you can get it cheaply enough, Visteon may one day pay off. But chances are good that Visteon's new shares will be wilting this summer.

Why? Lots of selling pressure as funds that track the Standard & Poor's 500-stock index purge Visteon. Because the spin-off isn't expected to be included in the S&P 500, the funds will be obliged to sell the stock. The biggest, Vanguard Index 500, at the end of April owned enough Ford to be in line for more than 1.3 million Visteon shares. Morningstar estimates that all U.S. indexed mutual funds own enough Ford to put nearly 3% of Visteon up for sale right away. And that's just mutual funds. Pension funds and a variety of other indexed portfolios will also have unwanted shares. Other investors may dump it just because they don't know Visteon from Vietnam.

Those clouds should blow over by fall. Not so Visteon's poor profitability. For this, the world's second-biggest maker of auto parts can mostly blame Ford, which accounted for 88% of its 1999 sales. Before setting Visteon free, Ford engineered a "market pricing review" and cut by 5% the prices it will pay for dashboards, air conditioners, bumpers, electronics, and everything else it buys from Visteon. Had Visteon operated this way last year, its Securities & Exchange Commission filing shows, it would have produced operating profit of $6,654 per employee. The average Delphi employee turned out $8,286. On the same basis, Visteon netted $281 million on sales of $18.7 billion--a margin of 1.5%. Delphi's net margin came to 3.7%, a bit above average for the top 10 parts makers.

BIG LEAD. Visteon is intensifying its drive to win contracts outside Ford, perhaps at better prices. Forty percent of Visteon's new orders last year came from other customers, and the parts maker's goal is to raise non-Ford sales to 20% of total revenue by 2002, up from 12% in 1999. Yet here, too, Delphi has lapped Visteon. It garnered 24% of revenues last year from non-GM customers.

What does Visteon say about all this? CEO Peter Pestillo and other executives have been keeping quiet ahead of the spin-off. But with operations in 20 countries, the world's second-biggest maker of auto parts does boast an enviable market position. It also has plenty of room to improve operations and profitability. And the stock is down. Wall Street hasn't waited for the actual distribution of Visteon shares. They began trading June 9 on a "when-issued" basis, slowly sinking it below 15 from above 18.

If you've got the time to wait for Visteon to catch up with Delphi and other rivals, the stock may prove a true bargain. At 15, it's trading at less than five times Wall Street's estimate of its earnings this year. By contrast, its 10 largest competitors go for an average multiple of 7, Delphi trades at 7.4, and Valeo, a key global rival based in Paris, goes for 11 times estimates of this year's profit. The S&P 500 gets a multiple of 23. What does that tell me? Delphi and Visteon both are cheap as soda pop, but with its clear lead, Delphi looks like the real thing.

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