Strattec Security Corporation: Are Cyclic Changes Fueling a Stock Surge, or Setting Up Investors for Disappointment?

MILWAUKEE, WI – Strattec Security Corporation, an American company specializing in auto parts, particularly keys, locks, and electric control systems, has seen a 35% increase in its stock value since last year. This rise has been attributed to the anticipation of a new cycle in the company’s operations, as well as excitement surrounding managerial changes and increased investor involvement.

The company has experienced marked operating income cycles, leading to rallies and busts in its stock price. While its revenues have consistently climbed, its gross margins have trended downwards from 25% in the 2000s to the current 9.5%, causing instability and cyclical fluctuations in its stock performance. This trend is indicative of input cost cyclicality, as the prices of plastics and metals in the company’s products directly impact its gross margins.

Speculation surrounding a potential new gross margin expansion cycle has arisen, particularly in light of recent corporate changes and board recommendations from major stakeholders. GAMCO (Gabelli Funds), which holds an 18% stake in the company, has been influential in driving these changes, including the appointment of new directors to the Board and the temporary replacement of the CEO by the COO.

Despite these developments, some experts remain cautious about the company’s long-term outlook. While the potential for short-term cyclical gains exists, concerns about the company’s overall trajectory and industry competition temper long-term investment prospects. Additionally, questions remain about the new managerial team’s ability to successfully develop and implement a strategy.

From a valuation standpoint, the company’s current EV/NOPAT multiple of about 15x has raised concerns, particularly given the company’s historical trend. This has led to a divide in investor sentiment, with some speculating on the potential for cyclical gains while others approach with a more evidence-based, long-term investment strategy.

In conclusion, while Strattec Security Corporation has shown promising signs of a potential new cycle and corporate changes, the long-term outlook remains uncertain. As the company navigates through its operational and managerial transitions, investors are advised to approach with caution and carefully weigh the speculative opportunities against the company’s historical performance and industry dynamics.