Battenberg: Wait 'Til Next Year

He must have known the question was coming. J.T. Battenberg III, who more than anyone embodies the struggling supplier on Wall Street, couldn't step down from the podium Tuesday afternoon without having to explain why suppliers have to stand on their heads to get any attention from the investment community.

Finally, at the end of his panel's question-and-answer session, Mr. Battenberg got the pitch from conference host David Cole: "As the world's largest automotive supplier, Delphi's stock performance will set the tone for the entire supplier sector. . . . How are you driving top- to bottom-line growth to improve return on capital? Give us your elevator speech on improving Delphi's stock price."

Improving shareholder value for (insert name of any supplier here) is the topic that spoils the appetite for many top executives attending the U-M conference. In Delphi's case, the former GM subsidiary has streamlined operations, expanded into high-growth component segments and rounded up billions of dollars in new business since its spinoff last year. Still, its stock performance has been less than remarkable -- down from about $17 in early 1999 to just over $15 per share.

His advice: Be patient. Someday, perhaps within a year, profitable stable companies will be cool on the Street.

Go back 40 years, he says, and you'll see that automakers and large, public suppliers recorded price-to-earning ratios that were about 80-90% of those recorded by the Standard & Poor's 500 stock index. Three years ago, that figure declined to about 70%, before Wall Street became infatuated with high-tech stocks.

"Today, it's running at about 25% of the P/E ratio of the Standard & Poor's. So we're at a 40-year low in the industry relative to valuation, and most of us are value stories," Mr. Battenberg says. "So we are swimming uphill clearly."

He notes Delphi is growing significantly above the 10% top-line rate that it initially targeted and has $9 billion in sales to non-GM customers this year. And net income growth has been 13% - over $1 billion; well above the 10% promised to analysts.

"I think the 40-year cycle will move," he says. "I think we're going to see some real return to value stocks. Many of us at this conference next year will be feeling a lot different about valuations. It's at 25% P/E ratio to the Standard & Poor's, and it will move back up to where it belongs in the 70-80% ratio."