Speculative Bet on This Auto Ancillary Stock - STRT

Mar 23, 2022 12:00 AM PDT | Team Kalkine
Speculative Bet on This Auto Ancillary Stock - STRT

Speculative Bet on This Auto Ancillary Stock - STRT

Strattec Security Corporation

STRT Details


Strattec Security Corporation (NASDAQ: STRT) creates, produces, and distributes mechanical locks, electronic locks, and keys. It also manufactures ignition lock housings and access control equipment. The company provides full-service aftermarket support and ships equipment to customers in the United States, Canada, Mexico, Europe, South America, Korea, and China.

Latest News:

  • Change in Board: Tina Chang was appointed to the STRT Board of Directors on February 8, 2022. Ms Chang is the CEO of SysLogic Inc., Brookfield-based cybersecurity and digital transformation consulting organization. Her strategic perspective, particularly on technology-based projects, would be invaluable for the company.
  • Fire Accident: On January 28, 2022, a fire broke out at VAST LLC, STRT's joint venture firm in Taicang, China, impacting a paint line. VAST China is actively shifting manufacturing to its China plant. Insurance coverage and equipment impairment are also being investigated right now.

Q2FY22 Results (period ended December 26, 2022)

  • Strengthening Balance Sheet: As of December 26, 2021, and June 27, 2021, the company's total current assets were USD 177.92 million and USD 174.90 million, respectively, compared to current liabilities of USD 66.84 million and USD 77.57 million, showing minor liquidity risk.
  • Modest Decrease in Sales: Due to a global semiconductor chip scarcity, the company recorded a modest decline in net sales to USD 112.91 million in Q2 FY22, compared to USD 127.36 million in Q2 FY21.
  • Strategic Advantage: As a result of its plan to be ready for a return to regular vehicle production rates later this calendar year, STRT has over USD 10 million more inventory than usual. As the supply chain difficulties improve, it will reduce overtime and prevent premium freight rates.
  • Decent Cash Position: As of December 26, 2021, STRT had USD 14.07 million in cash, compared to USD 14.46 million as of June 27, 2021.

Key Risks:

  • Competition Risk: STRT competes in a competitive automotive component supply market, where larger businesses with better financial and technological resources battle head-on. As a result, rivals' enhanced innovation or superior product development may harm the company's market share and financial performance.
  • Customer Concentration Risk: In FY21, STRT's three major clients (General Motors, Fiat Chrysler Automobiles, and Ford Motor Company) accounted for 62% of net sales and 61% of receivables, respectively. As a result, losing any of these essential clients might harm the company's bottom line.

Valuation Methodology: EV/Sales Multiple based Relative Valuation

(Source: Analysis by Kalkine Group)

Stock Recommendation:

The vehicle industry confronts output constraints due to supply and semiconductor chip problems. STRT, on the other hand, was able to stay profitable because of its increased efficiency. The post-termination audit by the PBGC was recently completed with no adjustments. That menace has now vanished completely. The 52-week high and low for the stock are USD 54.90 and USD 31.88, respectively. Considering the correction of 18.38% in the stock price in the past nine months, the slight decline in revenue, stable cash position, strategic advantage, and current valuation, we recommend a "Speculative Buy" rating on the stock at the closing price of USD 36.75 as of March 23, 2022, at 07:58 AM PDT.

Markets are trading in a highly volatile zone currently due to certain macro-economic and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

1 Year Technical Price Chart (as of March 23, 2022, at 07:58 AM PDT). Source: REFINITIV, Analysis by Kalkine Group

Technical Summary Analysis

*current market price as of March 23, 2022, at 07:58 AM PDT. 

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decision should be made depending on the investors' appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above. 

Note 3: Investors can evaluate the stock based on the support and resistance levels provided in the report in case of keen interest taking into consideration the risk-reward scenario.