July 30, 2009
Why is Federal-Mogul Corp in the ERRI?
Founded in Detroit in 1899, Federal-Mogul Corporation (FDML) supplies a range of components, accessories and systems to the automotive, small engine, off-road, heavy-duty, marine, railroad, agricultural, aerospace, energy and transport markets world-wide, including both original equipment manufacturers (OEM) and aftermarkets. It deals in power-trains, vehicle Safety and Protection, Global aftermarkets, and Automotive Products.
In February 2008, the company acquired Federal-Mogul Bearings India Limited. In August 2008, the company acquired a 51% interest in another Indian company, Perfect Circle. The company’s strong second quarter earnings and reports on July 30, 2009 that they had reduced headcount By 22% as compared with a year ago fueled an equity rally which had started earlier in the month.
FDML was trading under $3/share when much of the market struggled in early March, considerably down from the over $17 price the stock commanded in late August of 2008 before the reality of the credit and mortgage crisis had spread to the broad markets. FDML reacted vigorously in the intervening year, as evidenced by the 22% headcount reduction, and 2nd quarter sales are up. Stock price trends reflect “collective opinion” within the investment community. Investor sentiment is typically positive when the 50-day moving average is rising, especially if it’s also above the 200-day moving average. With that in mind, the 200-day numbers had just begun an upswing prior to the earnings report, while the 50-day average “crossed above” during May. Other technical indicators, such as the Chart pattern, complete a “mixed” outlook – as is true for much of the economy. Here, then, is an equity tied to the recovery of the automotive sector domestically and abroad – the 22% workforce cut is indicative of why the mortgage and banking sectors have such broad influence on the economy.
With $1.4 billion in market capitalization, FDML, a Mid-Cap stock, represents the global reverberations of what started out as a problem in the U.S mortgage lending industry, particularly auto and truck parts which wanted distancing from the extraordinary efforts with regard to GM & Chrysler within the ERRI. FDML is the ERRI bellwether for cyclical consumer goods in the ERRI fund, with cyclical goods comprising 10.11% of the entire fund. Sometimes likened to Honeywell, which is also in the fund, and to similarly capitalized TRW which is having a banner year by investor’s reckonings, FDML responds to the consumer side of the economic equation (consideration was given to balancing it with Hanes Brands in that regard.) Federal-Mogul reflects the broad, overall automotive industry, not just the “big 3” automakers in the U.S.
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