Delphi Automotive PLC (DLPH): Is TRW Automotive Holdings Corp. (TRW) Destined for Greatness?

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Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does TRW Automotive Holdings Corp. (NYSE:TRW) fit the bill? Let’s take a look at what its recent results tell us about its potential for future gains.

What we’re looking for

The graphs you’re about to see tell TRW Automotive Holdings Corp. (NYSE:TRW)’s story, and we’ll be grading the quality of that story in several ways:

1). Growth: Are profits, margins, and free cash flow all increasing?
2). Valuation: Is share price growing in line with earnings per share?
3). Opportunities: Is return on equity increasing while debt to equity declines?
4). Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you

Now let’s take a look at TRW Automotive Holdings Corp. (NYSE:TRW)’s key statistics:

TRW Total Return Price Chart

TRW Total Return Price data by YCharts

Passing Criteria 3-Year* Change Grade
Revenue growth > 30% 21.8% Fail
Improving profit margin 29.7% Pass
Free cash flow growth > Net income growth (69.5%) vs. 58% Fail
Improving EPS 49.7% Pass
Stock growth (+ 15%) < EPS growth 156.4% vs. 49.7% Fail

Source: YCharts. * Period begins at end of Q2 2010.

TRW Return on Equity Chart

TRW Return on Equity data by YCharts.

Passing Criteria 3-Year* Change Grade
Improving return on equity (39.7%) Fail
Declining debt to equity (63%) Pass

Source: YCharts. * Period begins at end of Q2 2010.

How we got here and where we’re going

TRW Automotive Holdings Corp. (NYSE:TRW) earns three out of seven passing grades today, having endured some rather divergent fundamentals over the past three years. Net income is up, but free cash flow is down. Shares have soared far beyond the growth of TRW’s bottom line, yet return on equity has weakened. Is the company’s share-price rebound sustainable? Can the fundamentals catch up to investor optimism? Let’s dig a little deeper.

TRW Automotive Holdings Corp. (NYSE:TRW)’s management stated that the increasing demand and vehicle production across North America and China has significantly contributed to the company’s growth. However, the ongoing economic turmoil in Europe has impeded its overall sales growth, since TRW has 42% of its sales exposure in European automobile markets.

Fool contributor Eric Volkman notes that TRW’s management is planning to shake up its existing shareholder roster. Automotive Investors — an affiliate of the Blackstone Group — and a few members of TRW’s management are offering approximately 10.9 million shares through a secondary issue, which might suppress share prices for the near future, at least.

TRW and Delphi Automotive PLC (NYSE:DLPH) are aggressively competing to capture market share in the automobile safety component segment. Similar to TRW, Delphi has 41% of its sales exposure in the European markets. TRW and Delphi Automotive PLC (NYSE:DLPH) are also fiercely competitive in the Chinese market — Delphi already derives a significant amount of its revenue from the Middle Kingdom, while TRW is expanding in the country with nine new manufacturing plants.

However, TRW sports a lower valuation, which Fool blogger Anh Hoang notes is at least partly a result of Delphi’s superior margins. Still, TRW could expand its margins in the future once its major expansion projects wrap up, leaving it free to better leverage its greater scale.

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