Strattec Security Corporation (STRT): Is Now the Time to Buy This Undervalued Auto Parts Stock?

The auto parts sector has faced headwinds from trade tensions, supply chain disruptions, and cyclical demand swings. Yet amid this turbulence, Strattec Security Corporation (STRT) stands out as a deep-value opportunity. With a valuation discount to peers, margin stabilization efforts, and a fortress-like balance sheet, the company is positioned to outperform as industry conditions stabilize. Let's dissect whether now is the time to capitalize on this undervalued automaker partner.

A Deep-Value Discount in a Cyclical Industry

Strattec's valuation multiples paint a compelling picture. At a price-to-earnings (P/E) ratio of 11.8, it trades below the industry median of 12.9, even as its EV/EBITDA of 4.0 is roughly half the sector average of 8.3. This stark discount suggests the market is underappreciating its operational improvements and restructuring gains. A Value Score of 88 (81-100 = “deep value”) further underscores its undervaluation relative to peers like Dorman Products (DORM) and Standard Motor Products (SMP), which command higher P/E multiples.

Margin Improvements: A Turning Tide

While gross margins dipped slightly to 13.6% in Q1 2025 due to one-time effects, the adjusted gross margin (excluding prior-year pricing benefits) improved to 13.6% from 9.1% in 2024. This reflects strategic wins: favorable sales mix, $2.2M in price increases, and cost reductions in raw materials and purchased components. Even as tariffs and Mexico manufacturing costs posed headwinds, the company's focus on forex benefits (190 basis points) and supply chain reengineering has stabilized profitability.

By Q3 2025, adjusted EBITDA reached $12.9M (8.9% of sales), a marked improvement over prior-year levels. With restructuring savings of $4.5M annually from Mexico plant reorganization—alongside $5M in total annualized savings—margins should expand further in 2026.

Strategic Restructuring: Building a More Efficient Engine

Strattec's restructuring in Mexico—reducing headcount by 12% and eliminating a production shift—may have incurred $1.6M in upfront costs, but the long-term benefits are clear. Combined with Milwaukee operations changes, annual savings could hit $5M. Meanwhile, pre-production costs (a drag on cash flow) fell by $6.9M in Q1, with plans to reduce the balance to $10M by year-end.

The company is also tackling tariffs head-on. A $9–12M annual tariff burden from U.S. trade policies is being offset via supply chain adjustments, customer cost pass-through, and logistics shifts. These efforts, paired with new contracts (e.g., Hyundai/Kia power door systems and Ford tailgate latches), position Strattec to capitalize on rising demand for advanced safety systems.

A Balance Sheet Built for Resilience

Strattec's liquidity has strengthened dramatically. Q1 2025 generated $11.3M in operating cash flow, versus a $3.9M outflow in 2024, as reduced working capital needs and operational efficiencies took hold. By Q3, cash reserves swelled to $62.1M, with no debt under its $40M credit facility. Even its 51%-owned joint venture (ADAC-STRATTEC LLC) carries minimal leverage ($13M debt vs. a $20M credit line). This fortress balance sheet provides a buffer against industry volatility, allowing Strattec to weather destocking cycles or production slowdowns by key customers like Stellantis.

Risks on the Horizon

No investment is without risks. The auto industry's cyclical nature remains a concern, particularly as Stellantis and other automakers destock inventory. Tariffs also pose a lingering threat, though Strattec's mitigation strategies have already absorbed some costs. Additionally, its P/B ratio of 1.04 slightly exceeds the industry median of 1.06, suggesting a modest premium on book value that could pressure shares if earnings disappoint.

Why Now is the Time to Buy

The pieces are aligning for Strattec. Its valuation discounts are stark relative to peers, and margin expansion is on track to accelerate once restructuring savings fully materialize. With $62M in cash and no debt, it has the flexibility to navigate near-term headwinds while capitalizing on growth opportunities—like its recent Aston Martin contract or expanding electrification-related product lines.

Investors seeking a leveraged play on an undervalued auto parts supplier with improving fundamentals should consider STRT. While near-term volatility is possible, the stock's deep-value status, operational turnaround, and fortress balance sheet make it a compelling buy for a long-term portfolio.

Jeanna's Take: Strattec checks all the boxes for a contrarian opportunity: it's trading at a discount to its peers, executing on cost cuts, and sitting on a cash pile that defies industry pessimism. For investors with a 3–5 year horizon, this could be a rare chance to buy a defensive auto parts name at a deep-value price.

Disclosure: This analysis is for educational purposes only. Always conduct your own research or consult a financial advisor before making investment decisions.