Financial services firm BB&T Capital Markets has initiated coverage of global supplier of powertrain and safety technologies, Federal-Mogul. Initiating its coverage of Federal-Mogul with a Buy (1) rating and $16 price target, BB&T said there are a number of rationales for its bullish forecast, including the fact that Federal-Mogul'' aftermarket segment leverages OE technology and brand equity and it has a highly diversified customer and product base.

Below are some highlights of BB&T’s Initial Report: “FDML: OE And Aftermarket On Bicycle Built For Two”
 
Initiating coverage with a Buy (1) rating and $16 price target, which implies -23 percent total return potential from the current level. Given that we are just now moving past the likely bottom in earnings, with near-term results likely to exhibit a gradual pace of recovery, we believe it prudent to value the shares using our 2011 forecasts, indicative of our expectations for near-term “normalized” earnings. At this point in the cycle, we believe that multiples of 10.7x our FY’11 EPS estimate of $1.50 and 6.1x our FY’11 EBITDA estimate of $720M are appropriate, and we are thus establishing a 12-month price target of $16.
 
Cost savings masked by severity of global auto downturn. Over the past 12 months, we believe Federal-Mogul has extracted ~$210M in costs, primarily through productivity enhancements. Unfortunately, we think these savings were largely masked by the severity of the volume declines in global auto production. That said, we believe the incremental profitability from these actions will become far more apparent upon an eventual return to a more normalized operating environment (global auto production in the mid- to upper-60M-unit range), in which we think Federal-Mogul could earn well north of $2.00 in EPS and $900M in EBITDA.
 
Potentially conservative estimates, significant leverage to the model. We believe that our current forecasts could prove conservative, as our FY’10 and FY’11 EPS estimates of 90 cents and $1.50, respectively, are based on OE volume increases of just 6 percent. That said, should production accelerate sooner than currently reflected in our model, we believe substantial incremental earnings generation would be realized. We believe that each point of outperformance in OE volumes would result in -7 cents of incremental EPS to our FY’10 estimate.
 
A more efficient ICE key to achieving “green” standards. We believe the internal combustion engine (ICE) will remain the dominant form of automotive propulsion for the foreseeable future. With its leading technology portfolio and history of innovation, we think Federal-Mogul is well positioned to assist leading automakers produce more fuel-efficient, lower-emission vehicles—especially in the wake of significant shifts in national fuel efficiency and emissions policies.
 
A Bicycle Built for Two. We believe one of the more compelling characteristics of the Federal-Mogul story is the company’s ability to leverage its technological expertise in the original equipment market into successful business wins within the aftermarket. We believe that this multi-channel approach allows investors to take part in growth levered to a recovery in global automotive production, while also providing downside protection in times of economic contraction.