My decision to buy cheap UK share TI Fluid Systems (LSE: TIFS) shares hasn’t gone to plan just yet. Since I bought just over a year ago, the auto components maker’s share price has eroded by more than a third (or 35.6% to be exact).
I fear that the rout might not be over either as the global car industry struggles and cost pressures persist. Both Tesla and Toyota have cut production further in recent days due to Covid-19 lockdowns in China and continued supply chain problems. TIFS’s share price has slumped amid fears of prolonged damage to auto output.
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But I continue to believe it has an extremely bright future as electric vehicle (EV) sales boom. And over the long term I expect its share price to rise strongly.
Riding the EV revolution
TI Fluid Systems supplies components that store and carry fluids, parts that are used in greater quantities in battery electric vehicles (BEVs) and hybrid electric vehicles (HEVs) than those with internal combustion engines. So it stands to be a big winner as demand for these cars explodes.
I’m encouraged by the rate at which TIFS is winning business with EV manufacturers. Last year it won “significant HEV and BEV programmes with multiple customers across all major production regions,” it said.
The business signed contracts worth €1bn of lifetime revenues in the field of BEVs alone in 2021. This represented almost a third of all its contract awards last year.
Impressively resilient
I think an argument can be made that TI Fluid Systems’ shares have been oversold given how resilient trading has remained in tough conditions. This is thanks in large part to the firm’s ongoing ability to outperform the global light vehicle market.
Revenues here rose 5.6% year-on-year in 2021, to €3bn, latest financials showed. Meanwhile margins increased 1% to 7.2%. As a result pre-tax profit jumped 35.7% from the prior year to €109.5m.
The strong showing was “achieved in the face of lower production volumes, global supply disruptions, labour shortages, rising costs, and volatile customer orders,” it said. The business added that its large profits increase “demonstrate the resilience of our business and our ability to successfully manage through difficult market conditions.”
Is the share price set to explode?
I’m actually tempted to increase my holdings in the company given the cheapness of its shares. City analysts think earnings will rocket 78% year-on-year in 2022. They think profits will rise an extra 50% next year as well.
As a consequence TI Fluid Systems trades on a forward price-to-earnings growth (PEG) ratio of 0.1. Any reading below 1 suggests that a stock could be undervalued. And this particular stock clearly looks especially cheap.
TIFS’ next results are due on 18 May. I think this could be the catalyst that drives the company’s share price higher again.
