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On Jun 17, we maintained our Neutral recommendation on TRW Automotive Holdings Corp. (TRW - Analyst Report) based on its higher revenue expectation in 2013. However, we are concerned about year-over-year drop in earnings in the first quarter of 2013, challenging pricing environment and high customer concentration.

Why the Reiteration?

On Apr 30, TRW Automotive posted earnings of $1.51 per share in the first quarter of 2013, topping the Zacks Consensus Estimate of $1.46. However, earnings fell 6.8% from $1.62 per share in the first quarter of 2012 due to lower operating income on the back of a higher mix of lower margin business and planned increases in costs to support future growth.

Revenues in the quarter were almost flat year-over-year at $4.2 billion as the impact of increasing demand for TRW’s innovative technologies and higher vehicle production volumes in China were offset by significantly lower vehicle production in Europe.

Following the release of the first quarter results, the Zacks Consensus Estimate for fiscal 2013 dipped 0.2% to $6.32 per share. Meanwhile, the Zacks Consensus Estimate for fiscal 2014 decreased 1.5% to $7.43 per share. The company now has a Zacks Rank #3 (Hold).

TRW occupies a leading position in the automotive systems market. It commands about one-fifth of the world market for airbags, seatbelts and related electronics. In addition, the company’s continuous focus on improving its vast product portfolio will have favorable impacts on the results.

The U.S. National Highway Traffic Safety Administration enforced a new regulation that requires all passenger cars to install side-impact safety devices from 2013 onward. This will significantly boost TRW’s sales and will benefit the company’s Occupancy Safety Systems division. Based on all these factors, TRW projected full-year 2013 revenues between $16.6 billion and $16.9 billion, including $4.3 billion for the second quarter of the year.

However, economic weakness in the European and North American markets will mar the company’s results. In addition, the company is under pressure due to the high customer concentration. TRW’s premium customer commands nearly 50% of the company’s sales.

Other Stocks to Look For

Some stocks that are performing well in the industry where TRW operates include Lear Corp. (LEA - Snapshot Report), Strattec Security Corporation (STRT - Snapshot Report) and Magna International Inc. (MGA - Analyst Report). All these stocks carry a Zacks Rank #1 (Strong Buy).

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