Dana (DCN) is the fourth multibillion dollar auto parts manufacturer in the past year to declare bankruptcy, following on the heels of Delphi, Tower and Collins & Aikman. The news not only points out the worsening troubles for the automotive sector, but reminds me again of those three all-important words: "margin of safety."
In October 2005, Delphi filed for bankruptcy, causing auto part manufacturing stocks to plummet. DCN fell from $10 to under $6. DCN has been the dominant axle manufacturer for years, actually having introduced the automotive universal joint in 1904. DCN is not simply domestic either, with 175 plants in 28 countries.
So, in 2005, it appeared with just 50% of its historical profitability, DCN's stock would be worth about $16, a significant rise from the $6 it was trading at. Other good omens were Lord Abbett's 11% ownership of the company, Capital Research's (American Funds) 10% and Gabelli's 7%. These three well respected managers had all gotten in at much higher prices. But the stock lost its appeal after a review of its financials. Why?
To sum it up in one word: debt. DCN sells almost $10 billion of axles per year and has generated about $300 million of operating profit, even in the recent lean years. However, the interest costs have run about $250 million, narrowing DCN's flexibility to $50 million. So any business blip could create a potential cash problem. That business blip showed up in the squeeze of a slowing economy accompanied by rising material prices.
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