Delphi Automotive Systems

GM refugee 1, WHEN Delphi Automotive Systems was spun off by General Motors last February, most analysts figured it would jump quickly from its $17 initial public offering price. After all, Delphi was no longer a captive of GM. Instead, its shares have languished. Recently, Delphi traded at $15, a bit more than seven times analysts' consensus earnings for 2000 of $2.03 per share, according to Zacks Investment Research. Raymond James & Associates analyst Greg Salchow thinks the stock price will rise to $25 within the next 12 months. "Delphi deserves a premium valuation due to its premier market position and longterm-growth potential," Salchow says. Adds Friedman of the Mutual Series funds: "Delphi looks very cheap."

Delphi Automotive is rapidly growing beyond its General Motors roots

The largest auto-parts manufacturer in the world, Delphi makes everything from batteries to shock absorbers to radios to catalytic converters to fuel-injection systems. It operates 168 facilities in 37 countries on six continents, owns 5,500 patents and employs 15,000 engineers.

In 1998, $6.2 billion of its $29 billion in revenues came from outside GM. Last year, $8 billion in sales was unrelated to GM. Delphi is proving its competitiveness, making electronic systems for Harley-Davidson, dashboards for Mercedes-Benz, and even circuitry for Ericsson mobile telephones. "NonGM business has grown 13% year-to-date and now looks to increase by at least 10% annually for the next two years," Merrill Lynch analyst John Casesa is telling clients.

Only 1.5% of its sales are outside the automotive industry, but J.T. Battenberg, Delphi's chairman, predicts those sales will double in the next several years. For instance, Delphi (DPH, New York Stock Exchange; 248-8132000 for shareholder report; www .delphiauto.com) is already making speakers for personal computers.

Battenberg expects the company's profits to accelerate as worldwide growth picks up. More than 70% of its operations and 24% of its sales are outside the U.S. Battenberg says he's puzzled by the stock's low price. In 1994 auto-parts manufacturers had P/E ratios that were 90% as high as the overall P/E of Standard & Poor's 500-stock index. Today, these manufacturers are selling at just 35% the P/E of the S&P 500. "l think it's overdone. We'll look back on Delphi a year from now and say, 'Holy cow, it really was cheap.'"

While the auto industry is notoriously dependent on the strength of the economy--and Delphi would suffer in an economic slowdown--the parts maker should hold up better than carmakers. That's because its fixed costs are lower. Although 90% of the firm's workers are unionized, Delphi can temporarily trim labor costs more easily than automakers. Moreover, some $2 billion of this year's sales will be from parts for cars already on the road--a figure that will increase if people buy fewer new cars and hold on to older ones.