Decoma International Inc. is a major international auto parts supplier of exterior vehicle appearance components and systems.  The Company designs, engineers and manufactures fascias (bumpers), front and rear end modules, plastic body panels, roof modules, exterior trim components, sealing and greenhouse systems and lighting components.  Decoma employs approximately 15,000 people in 49 facilities in Canada, the United States, Mexico, Germany, Belgium, England, France, Austria, Poland, the Czech Republic and Japan.  Magna International maintains effective control over Decoma with an approximately 74% ownership stake in the Company.

Decoma was spun out from Magna on March 2, 1998 and began trading on the TSX under the symbol DEC.a and on the NASDAQ under the symbol DECA. The auto parts industry is notoriously cyclical and is driven primarily by interest rates, consumer confidence and employment levels. However, historically low interest rates and aggressive incentive programs have bolstered sales over the course of the current cycle. Looking at the historic trading pattern, the shares have moved from an issue price of $9.50 CDN to a high of $21.10 CDN on June 4, 2002, and back to roughly $10 CDN today.

Decoma reports in US dollars and in 2003 generated $2.4 billion in sales, an increase of 15% from 2002. Net income declined to $71.9 million or $0.88 per basic share in 2003 from $93.0 million or $1.30 per basic share in 2002. The financial results were negatively impacted in 2003 by an impairment charge for certain United Kingdom assets of $12.4 million and by consolidation charges for European paint facilities of $11.4 million. We expect that Decoma will report improving financial results going forward as the European operations work through start up issues and new programs come on stream through 2005.

Decoma, and most stocks in the auto parts sector, have come under selling pressure related to several major issues. As we mentioned, auto parts are cyclical stocks that typically under perform in a rising rate environment. Further, volatile economic data, including key consumer confidence and employment growth figures, have added to the uncertainty. Skyrocketing oil prices have also negatively impacted the outlook for auto sales, especially sales of SUVs and light trucks. Tier 1 auto parts manufacturers, such as Decoma, are also facing demands from the OEMs for price concessions, as they try to maintain market share and boost their own profitability. On the manufacturing side, raw material costs have spiked, with steel and resin prices rising dramatically. Finally, Decoma has several facilities and programs ramping up, which hinders profitability until the product launch is well underway. With all of these influencing factors, investors have been frightened off; it is no wonder that Decoma has declined to near six-year lows.

We believe that Decoma is cheap, on an absolute basis, on an historical basis and relative to its peers. The Company pays a dividend of $0.28 per share in US dollars, which yields approximately 3.5% in Canadian dollar terms. Book value is approximately $7.58 US and it trades roughly at book value. Consensus earnings estimates are $0.93 US for 2004 and $1.11 US in 2005 with the stock trading well below 10 times this year’s and next year’s earnings. Auto parts stock typically bottom at these valuation levels. On a relative basis, Decoma trades well below its peers based on yield, P/BV and P/E metrics. While the Company may experience a weak quarter or two, we are comfortable that downside risk is limited at current price levels.

Given the reasonable margin of safety, we would like to point to several factors that could drive the performance of the stock over the next 12 to 18 months. First, we believe that the US Federal Reserve will raise rates at a measured and cautious pace that will not damage the economy or consumer spending. Next, Decoma has several major product launches through 2005, as the OEMs revamp and refresh their model lines. Look for new or restyled cars from Ford (Cross Trainer, Five Hundred and Montego), Daimler-Chrysler (Cherokee), GM (Canyon/Colorado) and Mercedes (A Class). So far this year, Decoma has been a beneficiary of strong sales of Chrysler’s new 300C sedan, available with the ferocious Hemi engine. The earnings improvement at Decoma coupled with less negative sentiment toward the auto parts sector should reward investors over the next 12 to 18 months.

ABC Funds
October 1, 2004