Fund manager Hermes tips Valeo as a stock to watch

9th October 2013

With sales of fuel-efficient car parts accelerating at an ever-growing rate, component designer Valeo has seen its shares rise to their highest level in more than a decade and  it appears more growth is expected writes Philip Scott.

Valeo, which works on the production and sale of systems for automobiles presently has some 123 plants and employs more than 73,000 people in 28 countries worldwide. In 2012, it generated revenue of €11.8bn.

In the last year it has witnessed its share soar by 80%, and by some 55% over past six months alone, on the back of strengthening sales. But despite the rally, Chi Chan, senior analyst at fund manager Hermes Sourcecap says the stock is still undervalued.

Until about four years ago, Valeo made its name as a manufacturer of lower-margin products, such as door handles and was vulnerable to the industry’s cyclicality. Its innovation into newer areas have made it more resilient and in the first half of this year sales growth accelerated 10.4% from last year, even as European orders fell 5%, and its operating margin expanded by 4% to €384m.

Engines in certain Mercedes, Peugeots and Citroens automatically stop when they become motionless in city traffic. Power returns as soon as drivers ease off brake pedals. This ‘stop-start system’ is one of the fuel-saving automotive parts that Valeo has specialised in manufacturing – and helped drive its stock to €64.3, its highest price in 15 years noes Chan.

He adds:Valeo is benefiting from the manufacturing model used by global auto groups. Volkswagen, General Motors and Fiat now apply platform rationalisation, building cars for their subsidiary brands from the same core components, offering production scale and speed. They need suppliers that appeal to consumer tastes, such as fuel efficiency, and operate globally.”

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