INVESTMENT THESIS
We are launching coverage of Aptiv PLC (NYSE: APTV), an automotive technology company, with a BUY rating. Aptiv is attempting to tackle the auto industry’s toughest problems, and looking to the future through an autonomous vehicle partnership with Hyundai. The pandemic has created a range of near-term challenges for Aptiv, though we look for earnings to grow again in 2021. The balance sheet is solid. Compared to the industry (ETF IYK), the shares are trading at premium multiples. We think that valuations are attractive given the company’s long-term growth outlook. Our target price is $140.
RECENT DEVELOPMENTS
The beta on APTV is 2.25.
Aptiv recently reported 3Q20 adjusted diluted EPS of $1.13, down 11% from the prior year but ahead of Street expectations. Net sales rose 3% to $3.7 billion. The adjusted operating margin was 10.6%. GAAP diluted EPS rose to $1.05 from $0.96 in 3Q19. In the first nine months of the year, the company earned $0.77 per share.
Along with the 3Q results, management provided guidance for 2020. It expects full-year net sales of $12.5-$12.7 billion, adjusted segment EBITDA of $1.5-$1.6 billion, and adjusted EPS of $1.65-$1.80.
The company also provided a view into 2021. Management expects a global market rebound of 10%, and looks for company revenue to grow faster than the market. It also expects margin expansion and growth through M&A.
The pandemic has had an impact on results. In 3Q, global vehicle production fell 4% and the company incurred $30 million of COVID-related expenses.
Aptiv is growing organically as well as through mergers and acquisitions and joint ventures. In 1Q20, the company launched a joint venture with Hyundai Motor Group to advance the design, development, and commercialization of automated vehicle technology. The JV, called Motional, is developing and commercializing SAE Level 4 vehicles – autonomous vehicles that perform all driving tasks. Motional is beginning to test fully driverless systems, and plans to make these systems and supporting technology available for robotaxi providers and fleet operators in 2022.
EARNINGS & GROWTH ANALYSIS
Aptiv is organized into two operating segments: Signal and Power Solutions (72% of 3Q20 sales), which leverages the company’s experience as a components provider and systems integrator to deliver high-speed data and high-power electrical systems. Recent trends in these businesses are summarized below.
Signal and Power Solutions sales rose 3% year-over-year in the latest quarter. High Voltage product sales rose 70%, while CV and Industrial end markets grew 4%. On the expense side, the adjusted segment EBITDA margin narrowed by 100 basis points to 17.7% due to higher COVID-related operating expenses and unfavorable commodity costs.
Active Safety product sales rose 22%, while User Experience product sales rose 2%. On the expense side, the adjusted segment EBITDA margin narrowed by 390 basis points to 10.8%, due in part to price declines.
Turning to our estimates, and based on recent sales and margin trends, we are establishing a 2020 adjusted EPS estimate of $1.75, above the midpoint of management’s guidance range. Our estimate implies an earnings decline of 63% from last year’s $4.80.
FINANCIAL STRENGTH & DIVIDEND
The company’s cash and cash equivalents totaled $2.1 billion at September 30, 2020. Debt of $4 billion accounted for 35% of total capitalization. The company’s operating margins are typically in the mid- to high teens. Cash flow covered interest expense in 3Q20 by a factor of 9.
Aptiv suspended its dividend in late March 2020 to help maintain its financial flexibility during the pandemic. It previously paid a quarterly dividend of $0.22 per share, or $0.88 annually.
The company does not buy back stock.
MANAGEMENT & RISKS
Kevin P. Clark has been Aptiv’s president and CEO since March 2015. Mr. Clark joined the company in 2010 and previously served as CFO. Joseph Massaro is the CFO; he joined Aptiv in 2013.
The company is attempting to tackle the automotive industry’s toughest challenges, including reducing traffic fatalities, reducing the environmental impact of cars and trucks, and anticipating demand for more intelligent and efficient mobility solutions. Over the years, the company has invested in automated driving and data capabilities, divested its hard-parts and powertrain businesses, and increased its scale and leverage in electrical architecture.
Aptiv investors face a range of risks, including competition, trade war concerns, environmental compliance, and potential litigation. The near-term outlook is also uncertain due to the COVID-19 pandemic.
COMPANY DESCRIPTION
Aptiv PLC manufactures and sells vehicle components worldwide. Providing electrical, electronic, and safety technology solutions to the automotive and commercial vehicle markets, Aptiv has two segments, Signal and Power Solutions and Advanced Safety and User Experience. The company has 141,000 employees. The shares are a component of the S&P 500.
VALUATION
On a technical basis, the shares have been in a bullish pattern of higher highs and higher lows since March 2020.
On a fundamental basis, the shares are trading at 30-times our 2021 adjusted EPS estimate, near the high end of the historical range of 10-33. Compared to the industry (ETF IYK), the shares are trading at premium multiples.
On December 15, BUY-rated APTV closed at $122.61, up $0.96.
Source: Argus
