Strattec will enter market at a crossroads

0 Comments | Milwaukee Journal, The, Feb 16, 1995 | by JOHN FAUBER

The Journal staff

Holders of Strattec Security Corp. stock will have their hands full figuring out what to do with their new investment when it becomes Wisconsin's newest public company later this month.

Many will hold on to it, and some, no doubt, will dump it. In either case, Strattec comes to the market at a crossroads.

The 80-year-old operation is the Glendale-based automotive lock division of Briggs & Stratton Corp. It will be spun off as a separate entity on Feb. 27. As a special dividend, Briggs shareholders will receive one share of Strattec for every five shares of Briggs stock.

On the plus side, Strattec has several things going for it.

The 1,700-employee operation is the market leader in the US automotive lock industry. It just turned in a solid performance in fiscal 1994, earning $7.8 million, not including accounting changes, compared with $1 million in fiscal 1993.

Through the first six months of fiscal 1995, earnings were $3.6 million, compared with $1 million in the same period the year before.

Strattec's 1994 sales were $97 million, up 18% from the previous year.

Even more promising is the prospect of substantial new business from Ford Motor Co. Until recently, the vast majority of the company's lock business had been with General Motors and Chrysler.

But Strattec recently learned it would be making locks for the Ford F-150 pickup truck and the Ford Taurus and Mercury Sable cars, said Stephen Keane, an analyst with Robert W. Baird & Co., which also is serving as the financial adviser to Strattec.

"It's the No. 1 selling pickup and No. 1 selling auto in North America," he said.

Keane said he could not comment on the dollar value of the new business, but said it should offset any loss of GM and Chrysler business in the event of a downturn in the auto industry.

Therein lies one of the darkest clouds on Strattec's horizon.

Auto industry stocks, even those of well-performing market leaders with considerably more capitalization than Strattec, have fallen into disfavor on Wall Street.

With higher interest rates and three strong years of booming car sales, many investors have looked to other opportunities.

"The timing {for the spinoff} probably is not best," said Richard Eastman, an analyst with Cleary Gull Reiland & McDevitt in Milwaukee.

Two Wisconsin automotive supply firms with much larger market capitalization than Strattec, Johnson Controls Inc. and A.O. Smith Corp., have seen their stocks languish in recent months despite record sales and earnings.

In addition, Strattec faces the prospect of increased competition.

Company executives did not return telephone calls, but in a recent filing with the Securities & Exchange Commission, Strattec noted its new European and Japanese competitors.

"Foreign-based competitors, who are in the initial stages of establishing a presence in North America, are most likely to provide the greatest competitive challenge to the company's traditional mechanical product line," the filing said.

Because about 70% of the stock of Briggs & Stratton is in the hands of institutional investors, Strattec's stock performance, at least initially, will be determined by those big investors.

Institutional investors may hold a stock for different reasons than smaller, individual investors. In the case of Briggs, they may like the company's $2 annual cash dividend or the company's core business, making small engines for the lawn and garden industry.

Strattec said it did not plan to pay a cash dividend and it was uncertain how investors feel about the auto lock business.

Analysts expect that Strattec will begin trading in the $10 range.