Every Monday we now feature “A Stock to Sell” as our daily post. With each sell, we give you a full explanation of why we advise against investing in these stocks.

This is part of our new approach offering you buy, hold and sell advice in our daily posts. You also get “Best Canadian Stocks” on Tuesday, “Our Top U.S. Stocks” on Thursday, and every Friday, our advice on one of the stocks that members of Pat’s Inner Circle have asked about in their weekly Question & Answer sessions.

Automodular Corp. (symbol AM on Toronto; www.automodular.com), assembles car and truck components, such as instrument panels, engines and rear suspensions.

The company operates two plants in Oakville, Ontario, that assemble parts for its one remaining automotive customer: Ford Motor Company’s Oakville assembly plant.

Automodular closed its Oshawa facility in 2010 after it lost its contracts with General Motors of Canada, which switched to a U.S. supplier after Automodular refused a sharp cut in its prices. These deals, under which Automodular supplied parts for the Camaro sports car, accounted for roughly 20% of its business.
In June 2012, the company opened a new plant in Brantford, Ontario, to assemble wind turbine components under an agreement with Vestas Nacelles A/S, a subsidiary of publicly traded Danish company Vestas Wind Systems A/S.

By doing this work at Automodular’s facility, Vestas met the Ontario Feed-in Tariff Program’s domestic content requirements. This program offers long-term purchase contracts to renewable energy producers, typically based on each technology’s cost of generation, at above-market rates.

However, Automodular finished the work for Vestas in late 2012, and the plant subsequently closed.

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Canadian stocks: Lower wage rates at automakers like Ford wipes out future contracts for Automodular

In the three months ended March 31, 2014, Automodular’s revenue fell 10.4%, to $19.5 million from $21.8 million a year earlier. Earnings declined to $3.2 million, or $0.16 a share, from $3.6 million, or $0.18. The latest quarter included the effects of a planned three-week plant shutdown by Ford.

In August 2011, Automodular resumed paying regular quarterly dividends at a rate of $0.05 a share. In January 2012, it raised the quarterly payout by 20%, to $0.06. The stock now yields a high 10.5%. The company also paid a special dividend of $0.10 a share in December 2013.

In October 2013, Automodular announced that it had signed an extension with Ford that would let it keep assembling components at its two plants until December 23, 2014. However, it also said that it expected to close the facilities after that agreement expires.

Automakers like Ford continue to lower their wage rates. That’s narrowing the gap between what suppliers like Automodular pay their workers and wages paid by carmakers. As a result, auto manufacturers are keeping more of this work in-house, which has left fewer contracts available for Automodular to bid on.

The company aims to find new opportunities in wind power and other industries, but whether it will be successful is far from certain.
We don’t recommend Automodular Corp. If you own the stock, we think you should sell.

Tomorrow you will see our story on a Canadian stock that has a very different outlook in “Best Canadian Stocks.”