Strattec Security Corporation

Strattec Security Corporation (NASDAQ: STRT) designs, manufacture, and distributes Mechanical locks, electronic locks, and keys are. It also makes access control equipment and ignition lock housings. Customers in the United States, Canada, Mexico, Europe, South America, Korea, and China benefit from the company's full-service aftermarket support.

Why Should Investors Book Profit?

• Weak Margin Profile: In Q2FY22, STRT’s reported gross margin was 13.2% vs. the industry median of 21.8% and reported net margin of 3.4% in the period under consideration which was lower than the 7.5% reported in the same period of the corresponding previous financial year.
• Competition Risk: STRT competes in a competitive automotive component supply market, where larger companies with more financial and technological resources are pitted against each other. As a result, the company's market share and financial performance may be harmed due to competitors' increased innovation or superior product development.
• Customer Concentration Risk: STRT's three biggest customers (General Motors, Fiat Chrysler Automobiles, and Ford Motor Company) accounted for 62% of net sales and 61% of receivables in FY21. As a result, losing any of these crucial clients could harm the company's bottom line.
• High Cash Conversion Days: Compared to the industry, the company has a long Cash Conversion Cycle (Days), meaning that it takes more days to convert its inventory to cash. In Q2FY22, its Cash Cycle was 95 days, compared to an industry median of 53 days.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation

(Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:

STRT's share price has declined 16.22% in the past nine months and is currently leaning towards the lower band of the 52-week range of USD 31.89 to USD 54.90. We have valued the stock using the EV/Sales-based relative valuation methodology and arrived at a target price of USD 33.68.

Considering the company's weak margin profile, current valuation and associated risks. we recommend a "Sell" rating on the stock at the closing price of USD 37.75, up 5.17% as of March 31, 2022.

Three-Year Technical Price Chart (March 31, 2022). Analysis by Kalkine Group

* The reference data in this report has been partly sourced from REFINITIV.

* All forecasted figures and industry information have been taken from REFINITIV.