HOME ASSIGNMENT Analysis of Auto Parts Industry/ USA /deviations, betas and correlations/ Module: Financial Markets Module leader: Prof. Gyorgy Komaromi Written by Laszlo Foldvari Industry Analysis I have choosen five companies from the Capital Goods sector / Autoparts Industry/ Nasdaq. The industry analysis is the essence and first step of getting a clearer view of the market players. We have to know the most important macroeconomical circumstances of industry as well. In the following pages I am going to analyze the industry, the choosen stocks and the brother industries.
I will try to find explanations for the changes caused by the financial crisis with the help of calculated sigmas, betas and pair-wise correlations for two one-year periods: before and after the fall of Lehman Brothers. Hopefully we can have a broader picture how the financial measure were affected by the financial crisis and WHY? As we all know obviously autoparts is industry seriously depends from Automoblie industry. Key Players are: In North America, the automobile production market is dominated by what’s known as the Big Three: General Motors – Produces Chevrolet, Pontiac, Buick and Cadillac, among others.
Chrysler – Chrysler, Jeep and Dodge. Ford Motor Co – Ford, Lincoln and Volvo. Two of the largest foreign car manufacturers are: Toyota Motor Co Honda Motor Co Let me emphasize a relevant feature of this industry and studied fact of economy and business cycle, whch can be a correct answer for the changes of stocks. ( Bodie, Essentials of Investment) „ As the economy passes through different stages of the business cycle ( like a recession, or financial crisis), the relative profitability of different industry groups might be expected to vary.
For example, at a trough, just before the economy begins to recover from recession, one would expect that cyclical industries, those with above-average sensitivity to the state of the economy , would tend to outperform other indsutries. Examples of cyclical industries are producers of durable goods, such as automobiles or washing machines. ” It means that sales are particularly SENSITIVE to macroeconomic conditions. Other cyclical industries are producers of capital goods. Goods used by other firms to produce their own products. These above writen facts are absolutelly related to the auto parts industry, which could mean that their industry should be very sensitive comparing to other industries. In english the capital goods industry is going to bear the brunt of slowdown BUT does well in an expansion. I have used historical data of the five stocks to calculate sigmas, betas etc. Based on realized returns we can estimate mean returns and volatility as well as the tendency for security returns to co-vary. Company Information about the researched firms. : Amerigon Inc.
ARGN: Nasdaq; Cyclical Consumer Goods ; Services/Auto / Truck / Motorcycle Parts Amerigon Incorporated (Amerigon) designs, develops and markets products based on its advanced, efficient thermoelectric device (TED) technologies for a range of global markets and heating and cooling applications. The Company’s principal product is Climate Control Seat (CCS), which it sells to automobile and light truck original equipment manufacturers or their tier one suppliers. The CCS provides year-round comfort to automotive seat occupants by producing both active heating and cooling.
As of December 2009, it had shipped approximately 5. 3 million units of its CCS product to customers. Its CCS product is offered as an optional or standard feature on 44 automobile models produced by Ford Motor Company General Motors, Toyota Motor Corporation, Nissan, Tata Motors, Ltd. and Hyundai. [pic] Amerigon stock prices started to fal at the beginning of 2008 . In my understanding it means that they depends on General Motors very much, and that time GM has not so good performance. They lost their competitive advantage and this is showed via chart in case of Amerigon as well.
Half year later the financial crisis hit them till the bottom, but as you can see and thanks for interventions and bailouts they started to come back very nicely. Howevery the stock price is still the half ( 7,5$ ) as it was. Williams Controls Inc. WMCO: Nasdaq; Cyclical Consumer Goods & Services/Auto / Truck / Motorcycle Parts Williams Controls, Inc. designs, manufactures and sells electronic throttle controls and pneumatic controls, and the Company has begun selling electronic sensors for heavy trucks, transit buses and off-road equipment.
The Company also produces a line of pneumatic control products, which are sold to the same customer base as its electronic throttle controls. These pneumatic products are used for vehicle control system applications, such as power take-off’s and air-control applications. The Company also sells sensors as separate product line, which includes two sensor technologies: contacting and non-contacting. The Company sells the majority of its products directly to heavy truck, transit bus and off-road original equipment manufacturers worldwide.
Its customers include The Volvo Group, Paccar, Inc. , Daimler Trucks NA, Navistar International Corporation, Caterpillar, Inc. and Hyundai Motor, Co. [pic] WMCO stock prices shows fall in the early 2008. As I have mentioned before, this was the beginning of the crisis of American Automobile industry. The stock prices were declining dramatically after 15 Sept 2008. For them the worst time was at the beginning of 2009. Commercial Vehicle Group Inc. CVGI: Nasdaq; Cyclical Consumer Goods ; Services/Auto / Truck / Motorcycle Parts Commercial Vehicle Group, Inc. CVG) is a supplier of fully integrated system solutions for the global commercial vehicle market, including the heavy-duty truck market, the construction and agriculture markets and the specialty and military transportation markets. The Company’s products include static and suspension seat systems, electronic wire harness assemblies, controls and switches, cab structures and components, interior trim systems (including instrument panels, door panels, headliners, cabinetry and floor systems), mirrors and wiper systems specifically designed for applications in commercial vehicles.
CVG classifies its products into five general categories: seats and seating systems, electronic wire harnesses and panel assemblies, cab structures, sleeper boxes, body panels and structural components, trim systems and components, and mirrors, wipers and controls. [pic] Based ont he chart CVGI seems very sensitive firm later I am going to compare betas and standard diviations. Fuel Systems Solutions Inc. FSYS: Nasdaq; Cyclical Consumer Goods & Services/Auto / Truck / Motorcycle Parts
Fuel Systems Solutions, Inc. (Fuel Systems) designs, manufactures and supplies alternative fuel components and systems for use in the transportation and industrial markets. Its components and systems control the pressure and flow of gaseous alternative fuels, such as propane and natural gas used in internal combustion engines. The Company also provides engineering and systems integration services to address its individual customer requirements for product performance, durability and physical configuration.
It supplies its products and systems to the market place through a global distribution network of over 360 distributors and dealers in more than 70 countries and more than 100 original equipment manufacturers (OEMs). In September 2010, the Company completed the purchase of EvoTek LLC, an alternative fuel automotive systems developer in North America. [pic] Fuel Systems Solutions, Inc is a produces globally. Their smart portfolio strategy helped them to come out very quickly from’ the mud of crisis’. Alternative fuel system has potential for the future, investors and goverments are pushing this industry.
In my opinion this can be an explanation of the quick recovery. Gentex Corporation GNTX: Nasdaq; Cyclical Consumer Goods & Services/Auto / Truck / Motorcycle Parts Gentex Corporation designs, develops, manufactures and markets products employing electro-optic technology: automatic-dimming rearview automotive mirrors with electronic features and fire protection products. It also develops and manufactures dimmable windows for the aircraft industry and non-automatic-dimming rearview automotive mirrors with electronic features.
During the year ended December 31, 2009, the Company began shipping auto-dimming mirrors with rear camera display (RCD) for the Ford Fusion and Mustang; Mercury Milan; Kia Forte, Morning, Opirus and Sorento; Toyota Tundra, Sequoia, Prius and Corolla Verso; Lexus RX350; Daihatsu Mira Cocoa; Mitsubishi Eclipse and Eclipse Spyder; Acura MDX and RDX; GMC Terrain; and Chevy Equinox. It also began shipping auto-dimming mirrors with RCD for dealer or port-installed programs for Mitsubishi, Toyota, Nissan and Subaru. [pic]
My first purpose is to show that I am aware of the meaning beta, sigma and correlation. Financial markets , corporate finance, macroeconomics seminars gave a good knowledge to discover the associations behind the number. STANDARD DEVIATION Briefly Standard deviation shows the spread or extent of the share prices changes comparing to the average. A Potential drawback of to use it as measure of risk is that standard deviation can treat positive and negative deviations from the calculated returns. Many times I have calculated negative Standard deviations, which shocked me.
Based ont he books we should find negative numbers just in special cases. Low standard deviations shows that they were close to the mean during the time of changes, whereas high standard deviations indicate that there were significant changes comparing to the avarage. ( mean). From the attached table of Standard Deviations it is obvious that the company shares were less volatile before the collapse of Lehman brother. After the birsthdate of financial crisis every company has a higher standard deviation. The US market became unbalanced. It took one year to recover the whole market.
The historical prices of stocks shows the way very clearly. They have decreased constantly and just at the end of the term they started come up from the deep water.. CVGI Standard deviation has grown by 300%. But almost in every case we can discover dramatic rises. What is the secret of CVGI? Over the last 10 years, continuing growth was achieved organically and though additional global acquisitions such as Monona Wire in the United States and Mexico and C. I. E. B. and PEKM in the Czech Republic. In my opinion they have invested quite a lot money into acquistion.
After the financial crisis maybe the company need more time to recover and they cannot invest into other sectors so the impact of financial crisis os more serious than by their competitors. Returns shows contract low level. BETA Beta is also a measure of risk and the sensitivity of stocks’s returns to the return on the market portfolio. I have calculated beta and on the figures it performs as the slope of the diagram. The benchmark is S$P 500, however I was thinnking about useing NasDaQ . According to the CAPM beta is a systematic risk that cannot be diversified away.
We have to know that beta is measuring the covariance movement and not the volatility. I have provided graphs to illustrate betas better. It also shows r-square, which means that in practice 0. 03565 means that 3. 56% of the stock’s performance is explained by its risk exposure, as measured by beta. Analyzing Beta of stocks table it seems that in most cases the risk = beta has grown after 15 Sept 2008. ARGN 2,2565 increased to 2,4891. The most significant rise of beta was CVGI from 1,75 to 2,39. As CVGI stock diagram showes they are still on low level.
Why has decreased betas of WMCO and FSYS ??? As I know beta shows risk, so in financial crisis every company should show bigger beta as in the previous period. EVEN so beta os WMCO and FSYS has decreased which financially means that these stock are not so risky as they were before. I could explain it as a reaction of the bailouts and the sensitivity. The US government reacted firstly for the crisis. The big Automobile manufacturers were helped , so as Auto parts industry depends on auto manufacturers, the bailouts has a very good effect for the stocks of capital goods sector.
So maybe int he beginning of the crisis around autumn 2008 the BETA has increased , but as it is a sensitive sector the good news helped significantly to decrease BETA. The stock reacted sensitively. | |2007-2008 | | | | | |ARGN |WMCO |CVGI |FSYS |GNTX | |Beta 1 |2,2565 |0,3387 |1,7571 |2,4153 |1,3168 | |Standerd Dev. |0,0915 |0,0330 |0,0859 |0,1248 |0,0471 | | |2008-2009 | | | | | |ARGN |WMCO |CVGI |FSYS |GNTX | |Beta 2 |2,4891 |0,2175 |2,3961 |1,9296 |1,4434 | |Standerd Dev. |0,1833 |0,0981 |0,2856 |0,1720 |0,1007 | | | | | | | | [pic] [pic] [pic] [pic] [pic] [pic] [pic] [pic] [pic] [pic] Correlation Coefficient R is always between -1 and 1. If the points are not ont he line then there is no correlation between the factors or numbers. (R= 0) It is perfect negative correlation.
Value of 1 is the perfect positive correlation which means that R is 1 or 100% and the line shows growing index or positive slope. If the line is perfectly negative then it is -1 . If the correlation is near to -1 ot 1 it means that the correlation is very closed or very high among the points or stocks. Using correlation is a very good method to find portfolio in which there are stocks which moves differently or helps each other, so in long term we can avoid dramatic losses. 2007-2008 | |Correlation Matrix |ARGN |WMCO |CVGI |FSYS |GNTX |S;P 500 | |2008-2009 |
Correlation Matrix |ARGN |WMCO |CVGI |FSYS |GNTX |S;P 500 | |ARGN |1 |-0,1238 |0,2987 |0,4278 |0,6950 |0,7353 | |WMCO |-0,1238 |1 |0,2386 |0,2659 |-0,0022 |0,1201 | |CVGI |0,2987 |0,2386 |1 |0,2900 |0,2767 |0,4543 | |FSYS |0,4278 |0,2659 |0,2900 |1 |0,5244 |0,6076 | |GNTX |0,6950 |-0,0022 |0,2767 |0,5244 |1 |0,7761 | |S;P 500 |0,7353 |0,1201 |0,4543 |0,6076 |0,7761 |1 | | As the excel spreadsheet shows, the correlation does not move so extreme very wide range.
There are only two negative correlations which could be valuated as there are only a few inverse proportion concerning on the companies returns. From this table the correlations seems that most of the stocks like ARGN WMCO CVGI were close to 30 %, which means that the correlation was quite week. After Lehman brothers FSYS-ARGN correlation growed to 42,78 % , which can be explained by his outstanding performance, plus well built global network and close relation to the growing east economies.
GNTX correlation has increased to 69% as well, which is close to 1. The correlations matrix shows some interesting pictures like ARGN – WMCO which is negative and far from 1. The highest correlation in 2008 – 2009 years period shows GNTX ARGN pair of companies with 69. 5% This means that in the given period the two stocks indicate a highly positive correlation that can be explained as that the two stocks are likely to change in value in same direction.
Comparing the same pair of them between 2007-2008 period was only 50%. The correlation has grown by almost 30%. However, there are trends with opposite direction, like in case of WMCO ARGN companies when before Lehman brothers bankrupcy correlation was 32,5 % and in the period 2008-2009 it felt by almost 43 % to – 12,38 %. I have done some graphs which shows the sensitivity of the different stock retruns comparing to S;P returns. [pic] [pic] [pic] [pic] [pic] [pic] [pic]