Should Investors Follow Carl Icahn Into This Auto Supplier?

However, the company’s safety technology product offerings position it for solid future growth, as industry regulators continue to push manufacturers to make more safety systems standard options across their vehicle portfolios.

Meanwhile, Johnson Controls has tied its fortunes to interior systems, including seating, instrument panels, and electronic information displays.Like its competitors, Johnson Controls has found limited sales growth in FY2013, while its profitability has been negatively affected by higher product launch costs and a sales mix that has tended toward lower priced products.

However, the company’s restructuring initiatives have led to stronger operating cash flow, roughly $1.6 billion in its latest fiscal year, allowing it to reinvest in higher growth areas, like its leading automotive battery franchise.

The bottom line

Federal-Mogul has some definite pluses, including leading product positions in important areas, like suspensions and brakes, and an active, majority shareholder who increased his stake above 80% through the recent rights offering.

However, the auto supply business is no place to run with a leveraged business model, due to the auto manufacturers’ negotiating power and long-standing practice of extracting price concessions from their suppliers each year.Federal-Mogul likely needs to continue shrinking its operating footprint and product portfolio, which currently tops 500,000 SKUs in its component segment, in order to reach a level of operating cash flow that will fund its product development.

Until then, investors might want to stick with the competitors that have stronger balance sheets and are winning a big share of vehicles’ overall component make-up, which will lead to better future growth trajectories.

The article Should Investors Follow Carl Icahn Into This Auto Supplier? originally appeared on Fool.com and is written by Robert Hanley.

Robert Hanley has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.